-- Posted Tuesday, 27 September 2011 | | Disqus

U.S. DOLLAR prices to buy gold rose to $1676 an ounce Tuesday morning London time – a 9% gain on yesterday's spot market low – as stocks and commodities also rallied and government bonds fell as reports circulated that European officials were drawing up new plans to battle the ongoing debt crisis.

The price to buy gold has now recovered all of yesterday's losses.

"Housewives are queuing up outside jewelry shops to buy gold after the dip," says one gold bullion dealer in Hong Kong, citing local press reports.

"At the current level people are buying," confirms another Hong Kong dealer, Ronald Leung at Lee Cheong Gold Dealers.

"They believed what happened in the past few days was only a correction."

"We continue to believe that gold will push higher into 2012," says Walter de Wet, commodities strategist at Standard Bank.

"However, until short-term funding, especially in Europe has been resolved, we remain neutral on gold."

Silver prices climbed to $33.54 per ounce – 28.2% up on Monday's low.

Overnight deposits made by Eurozone banks with the European Central Bank – rather than with each other – rose to a two-week high of €165.12 billion yesterday, a 9.6% jump from Friday's figure. Overnight ECB deposits hit their 2011 peak on September 12 at €197.75 billion.

Eurozone policymakers are currently devising a plan aimed at providing assistance to distressed European banks, according to a report published by financial news outlet CNBC on Monday.

Stock markets surged Tuesday morning – with the FTSE up 3% and Germany's DAX up 4.4% by lunchtime – in what CNBC's Jim Cramer hailed the 'No More Lehmans' rally, in reference to the plan.

The plan reportedly involves the European Financial Stability Facility – the Eurozone's €440 billion ad hoc bailout mechanism set up last year – as well as the European Central Bank and the European Investment Bank, which is owned by the 27 member states of the European Union.

The AAA-rated EIB, according to its website, exists to make "long-term finance available for sound investment" – including microfinance and loans to small businesses.

Under the new plan, the AAA rated EIB would set up special purpose vehicle capitalized by funds from the EFSF. This SPV would then issue bonds to private investors, using the money received to buy troubled sovereign debt. The SPV's bonds could also be used by the institutions that hold them – such as banks – as collateral against loans from the ECB.

The EIB "is certainly not a bailout-institution for the Eurozone," adds Jim Reid, head of global fundamental credit strategy at Deutsche Bank.

"[We understand the] EIB's charter currently does not allow sovereign or bank bond buying...changes to the EU Treaty with regards to the EIB's mandate would require a lengthy political process...[which] may involve all 27 EU member states rather than just the single-currency ones."

"Buying bonds," adds Standard Bank analyst Steve Barrow, "or recapitalizing banks works on the symptoms of the problem, not the causes...Eurozone growth will stay weak, leaving periphery countries like Italy and Spain fighting an uphill battle whether the EFSF can buy large amounts of their bonds or not."

Senior members of Germany's Free Democratic Party, the junior partner in the coalition government, said on Monday they would not vote for any plan that involves leveraging the EFSF – a suggestion made earlier this month by US Treasury secretary Timothy Geithner.

Over in Greece parliament is due to vote Tuesday on a new property tax aimed at cutting the country's deficit – while tax collectors are set to join a 48 hour strike in protest at the tax and other austerity measures. Greece is still awaiting confirmation that it will receive the next installment of its bailout funding – without which the government expects to run out of money within weeks.

Second hand home sales in Beijing meantime have fallen 73% in the last year, according to Chinese media reports.

Also in Beijing, Chinese consumers were given the chance to buy gold from the country's first gold vending machine over the weekend – although the machine was soon switched off again as it was not producing receipts.

China has been the world's fastest-growing source of private gold demand in recent years, and is currently the world's second-largest market behind India, according to World Gold Council figures.

-- Posted Monday, 26 September 2011 | Share this article | Source: GoldSeek.com

Volatility in Gold Creating "Dangerous Trading Conditions" as Margin Hikes Fuel "Stampede" of "Scared Investors"

ONGOING high volatility saw the gold price hit an eleven-week low of $1537 an ounce during Monday's Asian trading – a 7.2% fall from Friday's close – after gold futures exchanges in Shanghai and New York announced margin hikes for leveraged traders.

The silver price fell to $26.16 – its lowest level since last November – before rallying 14% in two hours.

Global stock markets rallied sharply along with broad commodities.

"When the cinema is on fire, the crowd will only calm down when the stampede finishes," commented one Hong Kong bullion dealer during Monday's Asian session.

"Retail punters are scared," adds one Singapore-based gold dealer quoted by news agency Reuters.
"There is a big Dollar buying frenzy now, which is dragging everything down and people have to liquidate just like 2008."

In October 2008 – a month after Lehman Brothers collapsed – gold fell more than 12% in a week, based on PM London Fix prices, while stock markets also saw heavy selling.

This morning's spot market fall to $1537 represents a 15.2% drop from the start of trading last week.

Based on PM London Fix prices, there has been no week when the gold price fell more than that amount since February 1983.

"Global currency performance is hugely dependent on volatility," says Steve Barrow, research analyst at Standard Bank in London, warning that "it looks as if volatility could still have a lot further to rise".

On the currency markets today, Dollar strength saw the Euro fall below $1.34 – down from $1.42 at the start of the month. The US Dollar index – which measures the Dollar's strength against a basket of other major currencies – has gained 5.5% since the start of September.

"When volatility is low," says Barrow, "higher-yielding currencies in the developed and developing world gain against the lower-yielding funding currencies, which have typically been the Yen, Dollar and Swiss Franc. But when volatility is high, things reverse and usually very sharply."

Over in New York last week, there was a 9.3% drop in the number of noncommercial – so-called speculative – long positions held by gold futures and options traders on the Comex exchange, according to data published Friday by the Commodity Futures Trading Commission.

The data cover the week ended Tuesday 20 September, so do not cover the rapid gold price moves of more recent days.
After its sharp drop in Monday's Asian session, the gold price surged $100 to hit $1637 by lunchtime in London today – though this is still around 15% down on last month's all-time intraday high.

Following market close on Friday CME group – which runs the New York Comex, the world's largest gold futures exchange – announced it will raise margins on gold contracts by 21%, with the margin on silver going up by 15.6%. On Monday the Shanghai Gold Exchange also announced it will be raising its margins for gold and silver.

The margin hikes have "exacerbated the selloff, forcing widespread liquidation of positions," says a note from Mitsui Precious Metals in London.

CME last raised margins on 24 August – a day which saw the spot market gold price drop by more than 8%.
"Dramatic price moves make for dangerous trading conditions," warns Mitsui.

"[However], the current low prices may present a good opportunity to buy gold. Once the current market panic subsides, it is difficult to see how the macro picture can be anything but bullish for gold."

"What we are seeing now is the illustration of a global phenomenon, the global crisis of sovereign risk," European Central Bank president Jean-Claude Trichet said Friday, speaking in Washington at the annual International Monetary Fund conference of central banks governors and finance ministers, which closed on Sunday.

"This is threatening financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond."

No official new policy announcements emerged from the conference – though newspapers on Monday report plans to boost the size of the Eurozone's bailout fund, the European Financial Stability Facility, from €440 billion to €2 trillion.

European officials at the conference also repeated recent suggestions that leverage be used to increase the EFSF's asset-buying potential, according to press reports.

European leaders agreed on July 21 that the EFSF should be granted new powers to buy government bonds and recapitalize troubled banks.

"Anyone who thinks that the EFSF will be a miraculous solution to the problem is making a very big mistake," said Antonio Borges, director of the IMF's European department, on Sunday.
"It is very important that we see a combination of the ECB and the EFSF...the ECB is the only agent which can really scare the markets."

"For monetary policy to remain effective," former ECB governing council member Juergen Stark warned a day earlier, "its responsibilities must remain within clear limits...opportunistic manipulations of the monetary policy framework of course damage the foundations on which that framework rests."

Ben Traynor

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

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

-- Posted Tuesday, 27 September 2011 | Digg This Article

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