Gold Fails to Hold Asian Gains, Next Large-Scale Devaluation “Could Be the Pound”

U.S. DOLLAR gold bullion prices failed to hold onto gains made in Monday’s Asian session, falling to $1611 an ounce by lunchtime in London, just a few Dollars above Friday’s six-month low, as the US Dollar extended recent gains.

Gold dropped 3.4% over the course of last week, including a sharp drop during Friday’s US trading.

“The latest price slide was accompanied by significant outflows from gold ETFs,” says today’s commodities note from Commerzbank.

“Investors on the futures market are [also] largely to blame [for the price drop].”

The speculative net long position of gold futures and options traders on the Comex fell to its lowest reported level since August in the week ended last Tuesday, weekly data from the Commodity Futures Trading Commission show. The spec net long is calculated as the difference between ‘bullish’ long and ‘bearish’ short contracts held by Comex traders categorized as ‘noncommercial’.

“Clearly, the market, which has been plagued by concerns over central banks’ commitments to continued monetary accommodation, was concerned about the downside that would be opened up in the absence of Asian players that were celebrating Lunar New Year last week,” says Marc Ground, commodities strategist at Standard Bank.

Trading volumes set a new record on the Shanghai Gold Exchange Monday, according to newswire Reuters, with more than 22 tonnes of the Au9999 contract (for bars of 99.99% purity) traded, as China’s markets re-opened following last week’s Lunar New Year holiday.

Silver meantime rallied back above $30 an ounce during Monday’s Asian session, trading either side of that level during the morning in London.

European stock markets were little changed on the day by lunchtime, with volumes reported lower with US markets closed today for Presidents’ Day.

Commodities were also broadly flat, with the exception of copper which was down more than 1.2% on the day by lunchtime in London.

On the currency markets, the US Dollar Index, which measures that currency’s strength against a basket of other currencies, touched its highest level so far this year this morning.

Following a two-day meeting in Moscow, G20 finance ministers issued a joint communiqué over the weekend saying they will “refrain from competitive devaluation” of their currencies.

“We will not target our exchange rates for competitive purposes,” the statement added.

“[The communiqué will] limit Japan’s ability to provide verbal guidance on the Yen moving forward,” reckons Adarsh Sinha, foreign exchange strategist at Bank of America Merrill Lynch.

“This likely takes away a key tool used by Japanese officials to weaken the yen at an unprecedented pace and shifts the burden of evidence to policy implementation.”

The Yen however fell further against the Dollar this morning, extending Friday’s drop and erasing most of the gains made last week ahead of the G20 meeting.

Following the onset of the financial crisis in 2007, the Yen rose by more than a third against the Dollar by mid-2011, though it has since weakened by more than 20%.

Elsewhere on the currency markets, Sterling fell to a seven-month low against the Dollar this morning, also edging lower against the Euro.

More money managers are shorting Sterling than buying it for the first time in five months, the Financial Times reports, citing the latest CFTC data.

“The Pound seems clearly at risk of following the Yen and suffering the next large-scale devaluation for a major currency,” reckons Mansoor Mohi-Uddin, head of global currency strategy at UBS.

“It is possible that the full benefits of [Sterling's] 2007/8 depreciation are yet to be realized,” said Bank of England Monetary Policy Committee member Martin Weale in a speech on Saturday, adding that “growth of exports and a shrinkage of imports would together be a helpful source of demand for UK output”.

The Royal Mint plans to make its first gold coins in India since 1918, in partnership with refiner MMTC-PAMP, with a view to marketing the coins in the world’s largest gold buying market, the Mint announced Monday.

The announcement comes as British prime minister David Cameron starts a three-day visit to India, where he is due to meet business representatives.

Ben Traynor
BullionVault

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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. Ben can be found on Google+

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