Gold and Silver Rally with Stocks as Euro Hits 23-Month Low, on "Grexit" Planning
Commodities / Gold and Silver 2012 May 24, 2012 - 08:44 AM GMTBy: Adrian_Ash
The WHOLESALE PRICE of gold investment bars rose 2.0% from yesterday's low to reach $1569 per ounce in London Thursday morning, recovering from $1535 for the fourth time since gold hit all-time peaks above $1900 in late-summer 2011.
European stock markets also rose from new 2012 lows, while commodities halted their plunge and the silver price rallied 3.4% to trade back above $28 per ounce.
The Euro currency also bounced after slipping to $1.2520 – a new 23-month low.
Raising the odds of a Greek exit from the Eurozone to 50-75% by 2014, "We assume Grexit occurs on Jan. 1 2013," says Citigroup economist Michael Saunders in a new report.
Citi's base scenario sees "Greece staying in the European Union and receiving external loan support" – an idea mooted by German weekly magazine Der Spiegel ahead of Wednesday night's "informal" summit of EU leaders.
After the meeting Herman Van Rompuy, president of the European Council, said that Greece's partners want it remain in the Eurozone, but Athens must "respect its commitments."
The Eurogroup Working Group – which advises Eurozone finance ministers – has "agreed that each [member] should prepare a contingency plan for the potential consequences of a Greek exit," Reuters today quotes an un-named official.
"The immediate Greece impact is manageable," reckons Germany's banking association BdB.
"I think [an exit] has been priced in by markets," says BdB's general manager Andreas Schmitz.
US, German, Japanese and UK government bonds all ticked higher Thursday morning, nudging interest rates for their "safe haven" debt down towards new record lows.
Core Eurozone stock markets also rose, but remained more than 6% lower from the start of May.
The Athens stock market shed another 3%, extending its fall to 22-year lows, but Madrid pushed 1.8% higher after the Spanish government injected €11 billion into part-nationalized Bankia lending group.
This morning's drop in the Euro helped raise the price of wholesale gold investment bars to €40,000 per kilo, unwinding the last of this week's previous 2.1% drop.
Even so, "The correlation with Euro/Dollar is quite strong at the moment," notes Credit Suisse analyst Tom Kendall.
"Today we've seen the Euro come back off its immediate lows ... and that has helped the precious metals get a bid again."
The 1-month rolling correlation of Dollar gold prices with the Euro/Dollar exchange rate – which would read 1.00 if they moved perfectly in lock-step – rose above 0.94 on Wednesday.
Gold's correlation with the Euro has only been stronger on 14 trading days in the last 675, since Athens first revealed a "black hole" in its government accounts and raised the 2009 budget deficit forecast to 12%.
"If gold moved entirely in lockstep with EUR/USD movements," says market-maker HSBC's precious metals team, "we would expect the bullion market to be much closer to $1100" – the level of gold investment prices when the Euro last traded at $1.25
"That gold now is $460 per ounce higher implies it may have some other underlying supportive factors" beyond a simple Euro connection.
Emerging-market central banks continued their gold investment in April, new data from the International Monetary Fund showed this morning, with Mexico, Kazakhstan and Ukraine all adding metal to their holdings.
The Philippines' gold reserves rose at the fastest pace since Lehman Bros. collapsed in Sept. 2008, up by 32 tonnes to a total of more than 194.
"[This will] gather much attention from market participants," says Edel Tully, precious metals strategist at Swiss bank UBS. "[It] should somewhat help sentiment for gold."
Central bank gold buying in the first 3 months of 2012 totaled 81 tonnes, according to latest data from market-development organization the World Gold Council.
That was equal to nearly four-fifths of all gold ETF and new coin demand from private investors.
"Overall higher global central bank and invest-ment demand almost balanced out the drop in demand from the jewellery and industrial sectors," notes Oliver Heuschuch at German refiner Heraeus' headquarters in Hanau, Germany.
Looking at the refiner's own flows, "Sales of gold investment bars in the last three weeks were significantly up, even though this has so far had no effect on the price of the metal," Heuschuch says in his latest weekly report.
In Asian trade overnight, "gold prices held fairly steady," says Standard Bank's daily note, "with profit-taking balanced by a resurgence in physical demand."
"Everyone is worried about Greece withdrawing from the Eurozone and [about] the global economy," says Dick Poon, head of precious metals at Heraeus' Hong Kong office, "and would rather keep cash on hand than buying anything."
Flash estimates for China's manufacturing activity pointed today to a further slowdown in April. Eurozone manufacturing activity quickened its contraction, with Germany's Ifo business sentiment survey also coming in worse than analysts forecast.
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 2012
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