Gold Following Euro Lower on Greece Debt Default Fears

Commodities / Gold and Silver 2010 Jan 25, 2010 - 07:12 AM

By: Adrian_Ash

THE PRICE OF GOLD failed to hold a brief rally above $1100 an ounce early in London on Monday, slipping back against all major currencies as Asian and European stock markets fell for the fourth session running.

US stocks ended Friday with their worst weekly loss since March 2009, back when the S&P 500 index hit a 12-year low.

Monday morning crude oil fell further below $75 a barrel. US, European and Japanese government bonds also fell, pushing interest rates gently higher ahead of this week's key policy meetings in Tokyo and Washington.

Keeping Japanese rates at 0.1% since Dec. 2008, the Bank of Japan will meet on Tuesday.

The US Federal Reserve – also holding its rates at a record low for the last 13 months – is expected to retain its 0.25% ceiling when it meets on Wednesday.

"Investors seeking a hedge against inflation risks and uncertainty in the financial markets continue to support gold prices," says a new report from Standard & Poor's analysts.

Raising their "assumption price" by 13% to $900 for 2010, however, "We expect prices to remain volatile and vulnerable to a downward correction," S&P adds.

The price of gold averaged $973 per ounce in 2009, greater by more than one-fifth from S&P's forecast.

Short-term, "The Euro-zone clearly finds itself in a crisis, perhaps the worst since the flotation of the common currency, and gold simply and blindly continues to follow," says Wolfgang Wrzesniok-Rossbach, head of sales at Germany's Heraeus refining group.

"Even for those who are not gold lovers, this seems to have no logical explanation and could well mean further losses for gold in the coming days."

Gold and the Euro typically move together versus the Dollar, showing a daily correlation of +0.52 on average over the last 10 years.

That correlation between gold and the Euro would stand at +1.0 if they always moved in lock-step. It has risen to average +0.75 since the metal peaked above $1200 an ounce and the single currency touched $1.51 at the start of last month.

"Incidentally it is not just speculators who are presently divorcing themselves from gold on account of their expectations of a falling Euro," says Wrzesniok-Rossbach.

Heraeus's chief analyst calls demand for gold bars "anything but outstanding...especially here in Germany", and notes how the gold ETF trust funds have suffered two weeks of investment out-flows.

"[But] we do not see a change in the trend in gold. For this to happen, worldwide interest rates will have to go up considerably – something that is highly unlikely to happen this year."

Latest data from US regulator the Commodity Futures Trading Commission show that betting in the gold futures and option market – where speculators leverage their money and typically "make the running" in prices – grew by 1.8% in the week to last Tuesday, reaching its largest level since mid-Novembers.

Within that rise, however, the greatest growth came from "spreading" contracts – meaning an equal number of bullish and bearish bets, which thus cancel each other out.

As a group, large investment funds and financial players actually cut their "net long" position in gold by 2.5%, taking the equivalent weight of their bullish-minus-bearish-bets down to 752 tonnes – the lowest level since Sept. 1st, the day gold began a 28% surge.

Setting a series of new record highs against all currencies bar the Japanese Yen and Australian Dollar, gold added $270 per ounce inside 14 weeks.

In the broader financial markets, "Concerns over Greece, China and Washington policy now seem to be converging," notes J.P.Morgan's chief currency strategist in Tokyo, Tohru Sasaki, pointing to Greece's fiscal crisis, Beijing's tightening grip on Chinese credit growth, and Washington's record peace-time government deficit.

Strength in the Japanese Yen – which has typically risen when "risk assets" such as commodities and global stock markets fall – "[may be] limited by the possibility that the Bank of Japan announces another liquidity injection when it meets on Tuesday," says Sasaki.

Easing credit conditions in the Tokyo money market, however, "is too indirect a form of policy to push [the Yen] sustainably lower," Sasaki says in a note to clients – which would point to continued price deflation in the world's second largest economy.

"We remain convinced that the US Dollar is still in a longer-term structural downtrend," writes Steven Barrow at Standard Bank today, "not just against the higher-risk currencies, but against the Euro as well.

"At some stage soon, the Dollar will be a sell again. But it is unlikely to be this week...if the strains in the Eurozone continue and escalate."

By Adrian Ash
BullionVault.com