By by Ben Traynor
Tuesday 05 July, 08:00 EDT
Asian “Bargain Hunters” Boost Gold, German Court Hears Greek Bailout “Economically Wrong”
THE WHOLESALE market price to buy gold climbed to $1505 an ounce Tuesday morning London time – 1.2% up on last Friday’s close – while stocks, commodities and US Treasury bonds also gained after yesterday’s Independence Day holiday in the US.
“Bargain hunting [has] helped the metal rebound from its low on Friday,” notes Swiss precious metals refiner MKS.
The price to buy silver also jumped, hitting $34.82 per ounce – a 2.8% gain for the week so far.
“From a technical perspective…gold could move towards $1445,” warns UBS Wealth Management analyst Dominic Schnider.
“We are still in a consolidation phase.”
Bullion dealers in Asia reported strong demand to buy gold on Tuesday from Thailand, as the country’s currency, the Baht, rose following the general election on Sunday.
Indonesian jewelers were also buying gold ahead of Ramadan, which begins on August 1 and is traditionally a time when consumers buy gold jewelry.
Here in Europe, the Financial Times reported Monday that the European Central Bank would only reject Greek debt as collateral if all three major ratings agencies declared Greece were in default.
If the ECB follows up on this threat, it will significantly impair the ability of Greek banks to access ECB lending.
Standard & Poor’s said Monday it would declare a “selective default” if a plan proposed by French banks to roll over Greek bonds is implemented. Fitch has also indicated a rollover would trigger a default rating.
Moody’s is yet to declare its position. However, its head of sovereign risk, Bart Oosterveld, said last month that only a voluntary rollover would fall outside the default definition, and that “it is hard to imagine something that is truly voluntary in the current environment.”
“The ECB is going to back down in the end…[it] cannot remove liquidity from the big Greek banks,” says Dimitris Drakopoulos, economist at Nomura.
Over in Germany, the Constitutional Court began hearings on Tuesday in a case brought by opponents of last year’s Greek bailout – including members of Chancellor Merkel’s party and a group of academics – who argue that Germany’s loans to Greece violated constitutional clauses protecting property and democracy.
“What is economically wrong can’t be legally right,” said Karl Albrecht Schachtschneider, speaking for the academics.
Meantime in China – the world’s second largest private gold-buying nation – commercial banks could be understating their exposure to local government debt by up to $540 billion, ratings agency Moody’s reported on Tuesday.
The loans were not included in a report published last week by China’s National Audit Office, suggesting “that these loans are most likely poorly documented and may pose the greatest risk of delinquency” says Moody’s vice president Yvonne Zhang.
The Moody’s report also estimates that up to 12% of all loans in the Chinese banking system could become non-performing, meaning the borrowers are close to or in default.
Some Chinese newspapers meantime report speculation that the central bank will raise interest rates this weekend – while others report state officials are lobbying for a “directed loosening” of monetary policy.
“Inflation pressures are still high,” said a statement from the People’s Bank of China on Monday.
Consumer price inflation rose to 5.5% in May, with June’s figure expected to breach 6% when published next week. The PBOC’s target is 4%.
China’s manufacturing sector, meantime, is showing signs of a slowdown, with the official purchasing manager’s index for the sector dropping from 52 in May to 50.9 last month. A figure above 50 represents expansion.
Despite this, “China may still need to raise interest rates before it halts on any further tightening,” reckons Minchun Sun, head of China research at Daiwa Capital Markets in Hong Kong.
“Curbing inflation remains the focus,” agrees Tommy Ong, senior vice president of treasury and markets at DBS Bank, also in Hong Kong, adding that China could let the Yuan rise in an effort to import lower inflation.
PBOC governor Zhou Xiaochuan has argued that China’s $3 trillion of foreign exchange reserves is a source of excess money supply, and “vastly exceeds” China’s “Reasonable requirements”.
An adviser to the central bank, Xia Bin, last month said China should buy gold with some of its reserves. Xia also advocated making high tech and green technology investments.
Ben Traynor
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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.
(c) BullionVault 2011
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