Loose Monetary Policy "Will Mean Strong Demand" for Gold

By: Ben_Traynor

WHOLESALE prices for gold bullion climbed to $1597 an ounce during Tuesday morning's trading in London – their highest level so far this week – while stock markets also ticked higher following news that Spain should receive some financial assistance for its banks later this month.

Silver bullion also gained, climbing as high as $27.61 per ounce, while other commodities were broadly flat.

US, UK and German government bond prices fell, while on the currency markets the Dollar gave back early gains against the Euro, with the latter rallying back above $1.23.

"Loose monetary policies, with a scope for more aggressive balance sheet use in the US and Europe, will keep real [interest] rates in most reserve currencies low (or negative) during 2012," says a note from Merrill Lynch analysts today.

"We continue to believe that this will allow investor demand to remain strong and prices to reach our $2,000 an ounce target by the end of the year."

Spain's government has been given an extra year to meet its 3% deficit-to-GDP target. Eurozone finance ministers meeting in Brussels Monday agreed that Spain should have until 2014 to meet the target.

"The move hardly offers Spain a reprieve," says James Nixon, chief European economist at Societe Generale.

"The same painful and sizeable adjustment will now be spread over three years instead of two."

The Eurogroup of single currency finance ministers also reached a "political understanding" on using Eurozone bailout funds to directly recapitalize Spanish banks once a single European banking supervisor has been set up next year, an official statement said.

Last month, the Eurogroup agreed a credit line of up to €100 billion for Spain's government to finance the restructuring of the country's banking sector. Finance ministers agreed yesterday that €30 billion can be used this month.

The €30 billion is "to be mobilized as a contingency in case of urgent needs in the Spanish banking sector," said Eurogroup president and Luxembourg prime minister Jean-Claude Juncker yesterday.

"There's no emergency here," added Luxembourg finance minister Luc Frieden.

"There's a clear path towards stabilization...the markets have to realize that the money is there, more money than is necessary."

The loans to Spain will be come from the temporary European Financial Stability Facility, and will later transfer to the permanent European Stability Mechanism "without gaining seniority status," the Eurogroup confirmed – meaning the ESM would not be a preferred creditor in the event that the full value of the loans are not repaid.

Benchmark yields on Spanish 10-Year government bonds fell back below 7% during Tuesday morning's trading. Italian 10-Year yields also eased, falling below 6%.

Elsewhere in Europe, Germany's Constitutional Court today began a hearing today looking at whether the ESM and the fiscal pact, which could see more budgetary powers transferred to Brussels, are in contravention of German law.

The case has been brought by a collection of academics, politicians and members of the public, and could further delay the launch of the ESM, which had been due at the start of this month.

"A considerable postponement...could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the Eurozone's ability to make necessary decisions in an appropriate timeframe," warned German finance minister Wolfgang Schaeuble Tuesday.

"Some member states of the Eurozone would end up having further big problems financing themselves."

The European Central Bank meantime "will do everything that is needed to improve the situation in the Euro area...within the limits of our mandate," ECB president Mario Draghi told the European Parliament Monday.

Over in the US, America's economy is "right at [the] edge" of needing further policy stimulus, Federal Reserve Bank of San Francisco president John Williams said Monday.

"If economic data keep coming in below our expectations...then I think we would need more [policy] accommodation," said Williams. A day earlier, two other Fed presidents said they could see a case for further accommodation measures such as more quantitative easing.

"There's skepticism that such actions will have a significant impact," says Standard Bank currency analysts Steve Barrow.

"Many countries are in, or close to, a liquidity trap. In a liquidity trap monetary policy becomes ineffective and fiscal policy is super-effective...if major policymakers get together and really decide to try to grow the global economy they need to co-ordinate fiscal expansion, not monetary expansion."

In New York, the speculative net long position of Comex gold futures and options traders – calculated as the difference between bullish and bearish contracts – rose 18.6% in the week ended last Tuesday, data released by the Commodity Futures Trading Commission show.

The value of China's trade balance meantime jumped by nearly 70% to $31.7 billion last month, according to official data published Wednesday. Export growth slowed however, falling from an annual rate of 15.3% in May to 11.3% last month. Growth in imports saw a bigger slowdown, growing by 6.3% in the year to June, compared to 12.7% year-on-year to May.

"[We expect] the government to introduce more policy easing measures to offset the slowdown in export growth," says Bank of America Merrill Lynch economist Lu Ting in Hong Kong.

"There will be huge stimulus."

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 2012

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