Gold "Consolidates", Re-Asserts Link with Euro

By: Adrian_Ash

THE PRICE OF GOLD rose Monday morning in London, nearing last week's high of $1439 per ounce as energy prices led a rise in commodity prices and silver bullion jumped more than 1.8% to fresh 31-year highs.

Stock markets were mixed, rising in Hong Kong and London but holding flat in Tokyo and Paris, while Brent crude oil rose to a new 30-month peak near $120 per barrel.

New data showed the fastest year-on-year rise in Eurozone factory-input prices since Oct. 2008

"[Only] an aggravation of the crisis of the sovereign debt" will stop the ECB raising rates reckon Commerzbank analysts in Frankfurt.

German government debt prices fell for the 8th day running this morning – the longest losing streak for 10-year Bunds since mid-2006 according to Bloomberg – ahead of Thursday's pre-announced interest rate hike by the European Central Bank.

"It is a shocking decision," says Jacques Cailloux at RBS in Paris. "We thought that the ECB would wait until September."

Interest rates on Portuguese government bonds rose to new post-Euro highs, hitting 8.60% per year on 10-year bonds, after accountancy giants Ernst & Young said that Lisbon will most likely need a bail-out before the general election called for June 5th.

"The ECB simply cannot raise rates too aggressively without breaking up the Eurozone," warns Simon Maughan at MF Global here in London.

On the forex market the Euro currency was little changed against the Dollar on Monday, standing 2.7% higher from ECB president Trichet's announcement a month ago.

Gold priced in the Dollar stood unchanged from early March, leaving the gold price in Euros some 2.3% lower for German, French and Italian investors.

Previously moving in the opposite direction to gold on average so far in 2011, however, the Euro currency has since shown a positive daily correlation with the gold price in Dollars.

The average correlation of +0.70 between gold and the Euro over the last month is also stronger than the last decade's average of +0.47.

It would read +1.0 if they moved precisely in lockstep. Last May's Greek deficit crisis saw the Euro's link with Dollar gold prices slump to a near-perfect inverse correlation of –0.92 as the single currency fell and bullion rose.

"[The Dollar gold price] has closed near $1425 for the past four consecutive weekly sessions," notes bullion bank Scotia Mocatta, "[and] appears to be consolidating the January to March up move.

"We believe the price action is continuation in nature, with an eventual resolve to the topside to $1500."

Also noting the "strong weekly close" in silver prices, "most...technical studies are still clinging to bullish signals," says Scotia.

"It is very difficult to fight the momentum" in silver prices, says a London dealer today.

Breaking through $38.00 early in Monday's trade, "it seems the stage has been set for another crazy leg of upward movement in silver," says a Hong Kong dealing desk.

"This is now a classical bubble when price movement itself becomes the reason for price movement."

Back in the gold market, exchange-traded trust funds experienced a second week of outflows on the latest data compiled by London's VM Group consultancy, with the giant SPDR Gold Trust shrinking to an 11-month low of 1211 tonnes.

Leveraged speculators in the gold futures market also trimmed their positions last week, say the latest Commitment of Traders data from US regulator the CFTC.

"[But] while the gold futures market is not overly bullish, the physical market is still a steady buyer," says Standard Bank's Walter de Wet, repeating his view that real interest rates "remain exceptionally low" and global liquidity continues to rise, pushing gold higher.

"The physical market is once again adjusting to a higher gold price, which we view as bullish...We now see increased buying whenever gold dips towards $1400."

By Adrian Ash
BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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