Wednesday, January 11, 2012

"Bullish Macro Factors" to Drive Gold in 2012 Rather than Dollar, "Ringleader of Intolerance" Germany sees Negative Growth in Q4

London Gold Market update from Ben Traynor

SPOT MARKET gold prices rose to a one-month high of just under 1647 per ounce Wednesday morning – a 5.1% gain for January – before easing back as the Dollar rallied on the currency markets.
The gold price in Euros meantime touched levels not seen since December 8, hitting €41,502 per kilogram (€1290 per ounce), while the Euro currency fell to 15-month lows against the Dollar following disappointing German growth data.
The previous day saw spot market Dollar gold prices break through their 200 day moving average, which yesterday sat at $1626.86 per ounce by PM London Fix prices.
"The move higher today was not expected as it was against a bearish picture," writes Russell Browne, technical analyst at bullion bank Scotia Mocatta, adding that "it will take a number of days of closes above the 200 day moving average to give the bulls confidence to re-enter the market."

"While the Dollar may not see a significant correction soon," says a note from Societe
Generale, "and is likely to continue to gain against the Euro as the Eurozone crisis persists, the
negative effects of a stronger Dollar on gold are likely to be largely diminished in 2012, allowing
the bullish macro drivers to dictate price action once again."

Silver prices meantime rose to $30.31 per ounce – level with the week's high and 8.6% up for the
month so far – before they too eased back, while stocks and commodities ticked lower and major
government bond prices gained.

Germany's economy shrank by 0.25% in the fourth quarter of 2010, newswire Reuters reports,
citing an official from the Federal Statistics Office. For 2011 as a whole, gross domestic product
grew at 3.0%, down from 3.7% a year earlier, official data show.

Growth in the Eurozone meantime was half that initially reported in Q3, European Union statistics
agency Eurostat now says, after revising Q3 2011 growth from 0.2% to 0.1%.

"Germany cannot isolate itself so easily from tensions within the Eurozone," says Joerg Zeuner,
chief economist at VP Bank in Liechtenstein.

"In addition the export sector is facing a difficult period given the fall in global demand."
"The best resolution [to the Eurozone crisis] that Germany take steps to reverse its trade
surplus," argues Beijing-based economist Michael Pettis.

"[However,] countries that run large and persistent trade surpluses never seem to understand that
their surpluses are mainly the consequences of domestic policies that generate additional domestic
growth by absorbing foreign demand."

Italian prime minister Mario Monti has called for more support from the European Union ahead of a

meeting in Berlin today with German chancellor Angela Merkel.

"I am demanding heavy sacrifices from Italians," he tells German newspaper Die Welt.

"[Unless] concrete advantages become visible...a protest against Europe will develop in Italy,
including against Germany, which is seen as the ringleader of EU intolerance, and against the
European Central Bank."

Almost the entire €489 billion the ECB lent to Eurozone banks at last month's 3-Year longer term
refinancing operation has been redeposited with the central bank reports news agency Bloomberg,
citing estimates from Barclays Capital made using ECB data.

"It's illusory to think that the [3-Year LTRO] will translate into credit generation," says Philippe
Waechter, chief economist at Natixis Asset Management in Paris.

"It will assuage some of the anxiety banks have regarding their liquidity needs. But they've engaged
into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled
with the deteriorating economy, not compatible with increasing credit."

Authorities in Iran meantime have blamed Israel for a car bomb that killed a nuclear scientist in

Also in Iran, local press reported yesterday that officials had denied rumors that the authorities
were blocking any text messages that contained phrases such as 'Dollar' or 'foreign currency'. The
imposition of US sanctions has reportedly led to increased interest in holding gold and Dollars as a
hedge against Rial depreciation.

Gold bullion dealers reported strong demand from India on Wednesday, Reuters reports, as
the Rupee rallied 1.5% against the Dollar to hit a one month high. The weak Rupee saw record
domestic gold prices in India last year, weighing on demand during what is traditionally a strong
season for buying gold.

China meantime imported a record volume of gold from Hong Kong in November, according to
official data. The Hong Kong government's Census and Statistics department reports that just under
102.8 tonnes of gold were imported by China, equivalent to 18% of China's total private sector
gold consumption in 2010 by World Gold Council figures. Imports from Hong Kong are generally
regarded as a proxy for overall imports.

Ben Traynor