Speculative sellers held responsible for gold's fall

With many gold traders opting to stay on the sidelines ahead of the conclusion of the two-day EU summit, prices fell further and Commerzbank blames selling by speculative financial investors.

Author: Ben Traynor
Posted: Friday , 19 Oct 2012

LONDON (BULLIONVAULT) - THE SPOT gold price traded lower to $1732 an ounce Friday morning in London, near one-month lows, while stock markets and the Euro also fell as a two-day European summit came to a close with several issues unresolved.

The gold price in Euros meantime sank to its lowest level since the end of August at €42,647 per kilo (€1326 per ounce).

Heading into the weekend, the Dollar gold price looks set for its second successive weekly fall, the first time this has happened since May.

"We hold selling by speculative financial investors responsible for the price slide," says today's Commodities Daily note from Commerzbank.

"In recent weeks they had strongly built up their positions and may now be seeing themselves forced to take profits given the faltering upswing."

The silver price also fell this morning, hitting a six-week low at $32.26 per ounce. Most other commodities saw gains, with the exception of copper which sold off, while US, UK and German government bonds all rallied.

Leaders meeting at the two-day European Union summit in Brussels, which concludes today, took a step towards the creation of a single Eurozone banking supervisor Thursday.

An agreement was reached that will give the European Central Bank supervisory powers over the approximately 6,000 financial institutions in the single currency area.

Germany has previously argued that only the largest institutions should come under ECB supervision. Under the agreement, day-to-day oversight for smaller institutions will remain in the hands of national bodies, although the ECB will have powers to intervene in any bank.

There is no agreement however on the direct recapitalization of banks by the European Stability Mechanism. Leaders agreed in principle to the idea of using bailout funds to recapitalize banks in July 2011, although the creation of a single banking supervisor has since become a prerequisite for that.

Thursday's agreement "papers over significant differences over the direct recap" one unnamed EU official told the Financial Times.

"The direct recap is going to be much more difficult."

A French source briefed Reuters to say they expect direct recapitalization could be as early as the first quarter of next year, although a German government source told the same newswire it is "very unlikely" to happen soon.

The summit's conclusions published Friday contained no mention of Spain or Greece.

"Here's an idea that almost certainly wasn't discussed at Thursday night's European summit," adds a story in Friday's Wall Street Journal.

"Using countries' gold reserves to lower the borrowing costs of Eurozone governments."

The WSJ report refers to a proposal by the World Gold Council that some Eurozone nations could reduce bond yields if they pledged gold as collateral.

"As a real asset, the use of gold as collateral is not inflationary," says economist Andrew Lilico in a paper by consultancy Europe Economics commissioned by the World Gold Council, "any more than would be the use of historic buildings or military equipment or islands or any other of the forms of collateral that have been proposed for distressed sovereigns."

Although it appears the proposal was not discussed at this week's EU summit, a draft paper on the subject has been published on the European Parliament website.

Over in India meantime, traditionally the world's biggest source of gold demand, gold bullionimports in the final three months of the year are set to rise for the first time in six quarters following recent gains for the Rupee, Bloomberg reports.

"The appreciation in the Rupee has caused the gold price to correct from the record levels and this correction is seen as an opportunity by many to get into gold," says fund manager Chirag Mehta at Quantum Asset Management.

"With the festival season and marriage season starting now, demand will gain further momentum."

Gold imports could rise as high as 200 tonnes this quarter, according to All India Gems & Jewellery chairman Bachhraj Bamalwa, up from an estimated 157 tonnes in Q4 2011.

In South Africa, Gold Fields has said all but 1500 of the 15000 gold mining workers threatened with dismissal have returned to work. Those who have not have been fired.

Ben Traynor