Safe Haven Status “Returning to Gold” as Euro Sinks After Weak Bond Sales, Banking Stock Slum

Safe Haven Status “Returning to Gold” as Euro Sinks After Weak Bond Sales, Banking Stock Slump

WHOLESALE MARKET prices to buy gold touched a two-week high at $1625 per ounce as London opened for business on Thursday, before pulling back to $1609 as commodities and world stock markets fell, led by Eurozone banking shares.

The 17-nation Euro currency fell to its lowest level in 16 months vs. the US Dollar.

Prices to buy gold and other precious metals had remained “well bid throughout” Asian trade on Thursday said a note from a Hong Kong dealer.

“Jewellers were restocking [and] demand was good in southern India,” says bullion merchant Chanda Venkatesh of CapsGold in Hyderabad, speaking to Reuters and citing a southern Indian festival.

“Jewelry demand for gold is pretty good,” agreed another dealer, but added that the price for gold futures holders to ‘exchange for physical’ (EFPs) fell hard overnight, possibly ahead of bullion sales due to New Year rebalancing in the big commodity-tracking investment indices.

“Gold appears at present to be living up more to its status as a safe haven again,” says a note from Commerzbank, citing “geopolitical risks” in Western sanctions against Iran, plus the ongoing Eurozone debt crisis.

In Iraq today, at least 50 people were killed in a series of bomb attacks, extending the death-toll since US troops pulled out in mid-December, while protests over rising fuel prices in Nigeria, the world’s 10th largest oil producer, were broken up by police.

Base metal and other commodity prices fell hard, but European crude oil contracts pushed higher to $113 per barrel despite the rising US Dollar.

Silver prices fell back 3% from a 3-week high at $29.70 per ounce.

“[Wednesday] saw gold finally beginning to break away from trading in step with risk assets,” said one London dealer this morning.

The correlation between gold prices and the VIX volatility index of daily movement in US equities – positive during most of 2011 – recently fell to its most negative reading in two years, notes Reuters Technical analyst Wang Tao.

“We believe that gold prices will recover in 2012, and we maintain our bullish posture,” says HSBC analyst James Steel, despite cutting his average forecast for this year from $2025 per ounce to $1850 this week.

Eurozone investors looking to buy gold today saw the price touch 3-week highs above €40,000 per kilo as the single currency slumped on the forex market to its lowest level against the Dollar since Sept. 2010 at $1.28.

Priced in British Pounds, gold briefly rose this morning above £1040 per ounce, a 2-week high first breached on the way up in August 2011.

“The UK is attractive to international investors because it is outside the Eurozone,” reckons John Wraith at BofA Merrill Lynch, commenting on the strongest foreign-investment demand for UK government debt on record set in Oct. and Nov.

Continued demand has since driven 10-year gilt yields down to 120-year lows below 2.00%.

But “If [the UK's] economic conditions deteriorate further,” says Wraith, “that could prompt a sell-off due to stubbornly high deficits.”

After Wednesday’s auction of €5 billion in new German Bunds drew demand of €5.3bn – only just improving on November’s technically failed €6bn auction – a new sale of French government  debt today met 1.6 times enough demand, sharply down from the 3.0 bid-to-cover made by investors last month.

Banking stocks dropped sharply across Europe, led by a 14% plunge in UniCredit as Italy’s largest bank priced a €7.5 billion shares rights issue fully 43% belowWednesday night’s close.

French bank Société Générale said today it is considering 1,580 jobs cuts at its investment banking division. In the same sector, Royal Bank of Scotland – now 83% owned by the British state – is weighing up to 10,000 job cuts, says the Financial Times, after being told by UK chancellor George Osborne to “scale back risky activities.”

The Mediterranean region of Valencia in Spain has meantime delayed repaying a €123 million loan to Deutsche Bank by at least 1 week, says the Wall Street Journal, while the Hungarian Forint today sank to a fresh all-time low against the Euro after Budapest scaled back a planned 12-month debt auction by more than one-fifth in the face of weak demand.

“We are very near boiling point in Hungary,” said SocGen analyst Benoit Anne in a note Wednesday, “with a crisis that may escalate into something much more serious than a simple macroeconomic crisis.”

Hungary must refinance almost €5bn of foreign debt in 2012, and is due to start repaying a 2008 loan from the International Monetary Fund (IMF) in February.

“Thousands of Hungarians have taken to the streets in protest at the country’s new constitution,” reports the BBC, under which the ruling Fidesz Party – now with only an 18% approval rating – has been accused of raising ethnic tensions with neighboring states, favoring itself in future elections, and compromising the central bank’s independence.

Adrian Ash
BullionVault

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Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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