Gold Rebounds after Asia Selloff, Soros Warns "Economic Collapse Will Spread"

By: Ben_Traynor

A HEAVY selloff during Asian trading on Monday saw the gold price hit a five-week low of $1492 an ounce – before staging a rally after London opened – while stocks were flat and commodities fell further.

The gold price at the London Fix on Monday morning was $1501 an ounce – a 0.9% drop from Friday afternoon.

Silver prices meantime fell to $33.60 per ounce – a 2.1% drop from Friday's close – before they too rallied.

The Greek parliament began debating a €78 billion austerity package Monday, ahead of a vote on Wednesday. Unions have called a 48 hour general strike on Tuesday and Wednesday in protest at the measures.

"Gold saw decent physical buying" in Asia while the price-per-ounce was above $1500, says a bullion dealer in Hong Kong. Once the gold price fell through that level, however, liquidation of short-term positions was "relentless" as stop losses were triggered.

Commerzbank analysts say they do not expect the gold price to retreat much further, as it is "still uncertain whether [the Greek] parliament will give its approval" to austerity measures, according to a note issued Monday by the German investment bank.

Failure to pass the austerity package will jeopardize an additional aid deal, as well as further payments of last year's bailout.

Greece's debt problem "probably needs...a 30-year time horizon to solve," former Bundesbank president Axel Weber told the Wall Street Journal on Monday.

Eurozone governments must choose between "default...partial haircuts or a guarantee [to cover] the outstanding amount of Greek debt," said Weber, adding that "the current piecemeal approach...inevitably leads to the latter solution."

"Let's face it: we are on the verge of an economic collapse...[that]could easily spread" beyond Greece, says billionaire investor George Soros.

Over in the US, President Obama is due to meet Senate majority leader, Democrat Harry Reid, and Senate minority leader, Republican Mitch McConnell, in separate meetings on Monday "to find common ground on a balanced approach to deficit reduction."

The meetings are aimed at brokering an agreement that would clear the way for Congress to approve a rise in the federal debt ceiling, currently set at $14.3 trillion. The US Treasury predicts it will hit that limit on August 2 – after which point it may have to default on existing debt if it cannot borrow more.

Missing a debt payment would represent a "fundamental change" in US creditworthiness, threatening its Aaa credit rating, Steven Hess, US analyst at ratings agency Moody's, warned last week.

"[The risk that] this might happen again...is perhaps not compatible with Aaa."

If the US were to suffer a ratings downgrade, US Treasury bonds "would likely drop in value, possibly by as much as $100 billion", according to research by S&P Valuations and Risk Strategies.

Over in Switzerland meantime, The Bank for International Settlements – often called the central banks' bank – warned in its annual report on Sunday that ultra-low interest rates "increasingly risk a reprise of the distortions they were originally designed to combat" and that global challenges such as inflation " are a direct consequence" of accommodative monetary policies.

"With the arrival of sharper price increases for food, energy and other commodities, inflation has become a global concern...the logical conclusion is that, at the global level, current monetary policy settings are inconsistent with price stability." 

"Real interest remains in negative territory," says Dominic Schnider, analyst at UBS Wealth Management, meaning the gold price "should keep the uptrend we have seen since 2008" over a six-month time horizon.

"And if you look at emerging markets, inflation remains stubbornly high... I think this remains quite supportive."

Here in the UK, Chinese premier Wen Jiabao – who began a three-day visit to the country on Monday – said he sees "difficulties in reaching [China's] full-year inflation target of 4%". 

This follows a piece he wrote in Friday's Financial Times in which he said his answer was "an emphatic yes" to questions of whether China could rein in inflation and sustain rapid growth.

By Ben Traynor
BullionVault.com

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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