Gold Drops through $1700, Draghi Faces "Baptism of Fire" after Greece Referendum Curveball

By: Ben_Traynor

U.S.DOLLAR gold prices dropped through $1700 an ounce Tuesday lunchtime in London – at one point showing a 3.3% fall from last week's close – as stock and commodity markets were also hit following news that the Greek prime minister has called for a referendum on last week's Euro Summit deal.

Physical gold trading was quiet, news agency Reuters reports, with premiums in Hong Kong falling to around $1 per ounce, having been $1.50 last week.

"Jewelry sector demand has been quiet as jewelers are unwilling to keep much of an inventory," reckons Dick Poon of precious metals group Heraeus.

"They are worried about consumption in Europe and the United States in Christmas holiday season, with the economic uncertainty looming large."

Silver prices meantime fell to $32.77 per ounce – 7.2% down on last Friday's close.

Tuesday's fall in gold prices follows a strong month for gold last month. Dollar gold prices, based on the London Fix, rose over 6% in October.

Stocks meantime had their best month in over two years, with the MSCI World Index up 11% according to data compiled by Bloomberg.

Despite that, stocks have had a poor start to November this morning. The FTSE was down 3.1% by lunchtime, while Germany's DAX lost over 5% of its value.

European stocks "are so cheap" says hedge fund manager Barton Biggs, known for his contrarian views.

"I must admit I don't own hardly any European stocks, but I'm intrigued by them...because it would certainly be a contrarian trade."

Greek prime minister George Papandreou announced late Monday that Greece will hold a referendum on last week's Euro Summit deal – although no firm date was given.

"The people will be asked whether they want to adopt [the deal] or reject [it]," said Papandreou.
"This sounds to me like someone is trying to wriggle out of what was agreed," retorts Rainer Bruederle, former German minister of economics and a member of junior coalition partner the Free Democratic Party.

"One can only do one thing: make the preparations for the eventuality that there is a state insolvency in Greece and if it doesn't fulfill the agreements, then the point will have been reached where the money is turned off."

"The Greek referendum is a real curve ball," says Steven Saywell, head of FX strategy at BNP Paribas. 

"Nobody saw it coming and it injects a lot of uncertainty." 

Elsewhere in Europe, yields on 10-Year Italian government bonds rose for the third day running, breaching 6.25%. The spread above benchmark German bund yields hit a Euro era high at 4.37 percentage points.

The European Central Bank began buying Italian (as well as Spanish) government debt on the open market back in August, the last time Italian yields were at these levels.

Former Italian central bank governor Mario Draghi – who takes over as ECB president today – said last week that the Eurosystem of central banks "is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission."

Draghi's comments were seen by some as a coded hint that the ECB would continue buying Italian debt, along with that of other troubled sovereigns. However, outgoing ECB president Jean-Claude Trichet has said this is a misinterpretation.

"This will be a baptism of fire for Draghi," says Nick Kounis, Amsterdam-based head of macro research at ABN Amro.

In New York meantime broker dealer MF Global filed for bankruptcy yesterday, having reportedly taken writedowns on Eurozone sovereign debt following last week's Euro Summit deal. The New York Times reports that US regulators are investigating claims that hundreds of millions of dollars in customer money has gone missing from MF Global over the last few days.

Here in the UK, GDP grew at 0.5% during the third quarter, according to figures published by the Office for National Statistics on Tuesday.

"The good news is that UK GDP growth came in slightly above expectations," says Howard Archer, chief UK economist at IHS Global Insight.

"The bad news is that this performance overstates the underlying strength of the economy and this is likely to be as good as it gets for some time to come."

"We are living through the greatest credit crisis of our generation," Bank of England Financial Policy Committee member Robert Jenkins said in a speech last month, published on the Bank's website this morning.

"And needless to say, it is not over."

The Organisation for Economic Co-operation and Development yesterday cut its global growth forecast, less than two months after it last revised it downwards.

Argentina's government meantime has imposed restrictions on those wishing to exchange Pesos for US Dollars.

"This is an important measure to combat tax evasion and money laundering," said finance minister Amado Boudou, though others have suggested the move is aimed at stemming capital flight that has been a drain on Argentina's foreign exchange reserves.

The restrictions "may backfire as it may lead agents to accelerate Dollar buying in anticipation of potentially even more restrictive/punitive regulations in the near future," reckons Alberto Ramos, economist at Goldman Sachs.

China's manufacturing sector showed signs of a slowdown last month, according to the latest official purchasing managers index data. China's manufacturing PMI for October fell to 50.4 – compared to 51.2 in September (a figure above 50 indicates expansion).

Vietnam's central bank meantime is seeking to restrict gold bullion trading. The draft decree from the State Bank of Vietnam includes a reduction in the number of bullion traders, restrictions on manufacturing of gold bars and powers to intervene in the domestic gold market, where there have been accusations of traders manipulating domestic gold prices.

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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