By From Adrian Ash
As Eurozone Debt Crisis Returns, US Fed “Playing with Fire”
THE PRICE OF GOLD in wholesale dealing held flat Monday morning in London, easing down to $1226 an ounce as European stock markets rose but government bonds and traded commodities were also unchanged.
“The Federal Reserve has begun to play with fire, the effects of which I doubt Bernanke fully appreciates,” writes John Hussman of the eponymous $6.3bn asset management group in the US, extending his Strategic Total Return Fund’s exposure to precious metals to 10%.
Following the Fed’s revival of quantitative easing at the start of this month, “We would prefer the opportunity to accumulate a larger exposure [to gold investment] on substantial price weakness,” Hussman adds, noting that “Mining stocks have essentially gone nowhere since May.”
“The markets dip in May and come back after the summer,” said Swiss-based fund manager Patrick Pittaway of URAM to CityWire last week.
“From today onwards this is the strongest time for gold.”
A report from Canada’s CIBC research firm, also quoted by CityWire, says gold has risen in sixteen of the last 20 Septembers.
Weak data from France and Germany meantime kept the Euro currency under pressure on Monday morning, pushing it back below $1.27 after Friday’s two-cent loss.
The gold price in Euros held above €31,100 per kilo, just shy of Friday’s new 7-week high.
German Bund prices edged higher, even as Eurozone stock markets rose up to 1%. But weaker Eurozone debt prices fell again, pushing the gap between German and Irish yields “back towards the levels last seen in May,” according to the FT‘s Alpha blog – “before the European Union’s €750bn bailout package for troubled sovereigns was announced.”
“The slide in debt prices has not been confined to the ‘periphery’ however,” says Bank of New York Mellon analyst Neil Mellor.
“Notably the yield spread on French 10-year debt over Bunds has also risen 0.1%” in the two weeks since the Federal Reserve spooked investors by reviving its quantitative easing program by recycling $150bn in maturing mortgage-backed bonds into US Treasury debt.
Anglo Irish Bank today transferred £6 billion of poorly performing loans (US$9.3bn) to Dublin’s government-owned “bad bank”, reports Reuters, accepting a discount of 61% for using the facility.
In Madrid, Spain’s secretary of state for social security, Octavio Granado, is quoted by finance paper Cinco Dias as saying that – by the end of 2010 – some 90% of all Spanish pension savings will be invested in domestic government debt, thanks to the government buying its own bonds with the national retirement fund.
“Our data show that there has been renewed buying of German debt in August,” says Mellor at BNY Mellon, “whilst there has been a sharp resumption in selling of Italian debt after a period of respite.”
After last week’s multi-year and new record lows in a raft of US, Japanese and German yields, “Bond markets have rallied pretty dramatically in recent weeks,” says Steve Barrow at Standard Bank.
“We suspect this is down to a surge in fear.”
Back in the gold market, new data from US regulator the Commodity Futures Trading Commission said late on Friday that the recovery in gold futures demand continued last week, with hedge funds and other large speculators now well over 90% bullish again after July’s dip to 86%.
That compares to the five-year average of 83%.
“Gold has had a pretty much straight line run-up this month and is now getting overbought to a degree that is not sustainable,” reckons Phil Smith in his Reuters Technical analysis from Beijing.
But finishing “in positive territory in fourteen of the last eighteen trading days,” notes a London dealer today, “it will take a more significant retracement than this one to break the 4-week uptrend.”
Last week saw the SPDR Gold Trust – the world’s largest exchange-traded gold fund, with some 1300 tonnes of metal – regain another third of last month’s 3% drop in its gold bullion holdings.
“[Gold] is unlikely to materially weaken,” agrees the latest technical note from bullion bank Scotia Mocatta, “unless it drops below trend line support at $1221.
“Accordingly, we view the current uptrend to still be intact.”
Silver prices edged further down, meanwhile, from last Friday’s 5-week closing low of $18.02 an ounce.
Crude oil was little changed early Monday near $74 per barrel.
Adrian Ash
Gold price chart, no delay | Buy gold online at live prices
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
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