LGMR: Gold “Well Positioned” as New Risks Whack the Euro, Stocks, Silver and PGM

London Gold Market Report
from Adrian Ash
08:50 ET, Tues 1 June

Gold “Well Positioned” as New Risks Whack the Euro, Stocks, Silver and PGM

THE PRICE OF GOLD in wholesale dealing rose against all major currencies early Tuesday, hitting two-week highs against the Dollar above $1224 an ounce as world stock markets slumped almost 2%.

The Euro dropped nearly 2¢, hitting a new four-year low on the currency markets, after the European Central Bank warned that Eurozone banks face €195 billion in bad debts.

Gold priced in Euros rose within 0.4% of mid-May’s all-time record highs, trading back above €32000 per kilo.

“Gold’s uptrend still look intact despite being over-bought short-term,” reckons one Hong Kong dealer in a note.

“The fear factor is still in the marketplace…which makes gold investment a reasonable alternative to equities,” says a Swiss commodity analyst, speaking to Bloomberg.

“Gold remains well positioned to benefit from risk aversion,” agrees Walter de Wet at South Africa’s Standard Bank.

“Speculative length [in Gold Futures] remains at acceptable levels despite gold’s rally of the past two weeks. As expected, platinum has seen a very large liquidation of non-commercial long positions.”

New data, released after Friday’s close, showed speculative traders in US gold futures and options reducing their bullish exposure in the week-ending last Tuesday.

The “net long” position of bullish minus bearish contracts held by non-gold-industry players shrank 9% to a four-week low equivalent to 921 tonnes of gold.

As London’s precious metals market re-opened after the Whitsun Bank Holiday on Tuesday, platinum and palladium prices fell a further 0.7%, extending May’s 10.5% drop.

Silver prices dipped with base metals and the platinum-group metals.

Crude oil fell hard, down to $72 per barrel as base metals also dropped.

“Safe haven” government bond prices rose, in contrast, pushing yields back down towards last week’s multi-month lows.

The British Pound also leapt to near a 3-week high, after the Prudential insurance group’s bid for AIG’s Asian unit was rebuffed, delaying if not killing the need for a $30 billion Sterling exchange.

Gold priced in Sterling reversed an earlier gain to trade unchanged from last week’s record-high monthly finish of £840 an ounce.

“We on [Credit Suisse’s] global strategy team remain overweight of gold,” says a new report from Andrew Garthwaite’s team in London, “and see…that the gold price could rise another 10% to 20%.”

Supporting the current bull-run in gold, Credit Suisse’s equity strategy team believe, are low real rates of interest; an “80% chance” that quantitative easing or the threat of a sovereign government default will continue; low gold allocations both at Asian central banks and global investment funds; the lack of “bubble behavior” in the gold price; sharply higher gold mining costs between now and 2015; plus the “shortage of a reserve currency” for investors to hold worldwide.

“There are no safe big-cap currencies,” says the Credit Suisse report, recommending investors buy what it calls “cheap” gold mining shares such as Newmont.

“German investors have not been put off the slightest by the high gold prices,” says Wolfgang Wrzesniok-Rossbach at refinery group Heraeus in Hanau.

“Increased [investment] demand was met by limited supply, so much so that despite increased production of bars (and certainly gold coins too) in the past two weeks, the waiting period for delivery went up considerably.”

Meantime in the government debt market today – where the European Central Bank said yesterday that it’s raised its purchases of Eurozone bonds – “By buying up Greek debt, the ECB keeps the prices of the bonds artificially high,” notes Germany’s Der Spiegel magazine online.

“French banks, in particular, benefit from this policy,” the magazine says, because French institutions now hold €80 billion in Greek government bonds. German banks, in contrast, have agreed with the Berlin finance minister not to sell their Greek bonds at all until May 2013.

“Thus, in a roundabout way, the [German] Bundesbank, by spending €7 billion to purchase the Greek securities, has already made a substantial contribution to bailing out banks in neighboring France,” says Der Spiegel.

Adrian Ash

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Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

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.