Monday, January 9, 2012

German Bid to Cover Ratio Down. JP Predicting Three PBOC Reserve Cuts.

Entering the U.S. market open, silver is up $0.42 to $29.17 and gold is up slightly to $1619.  The news last night came out of Germany which had a successful government bill auction, but check out the bid-to-cover ratio,

"Germany successfully auctioned €3.9 billion of 6-month government bills – known as Bubills –
Monday morning. However, the bid-to-cover ratio was down on the previous auction last month,
falling from 3.8 to 1.8."

Additionally, are friends over at JP Morgue are expecting the People's Bank of China to announce three cuts
in the reserve requirement ratio in the first six months of this year.  This would appear on paper to be very bullish for silver and gold.


London Gold Market Report
from Ben Traynor
Monday 9 January 2012, 08:40 EST

Gold "Still Above Bullish Three Year Level" as "Basket Case" Europe Means Germany Now
Getting Paid to Borrow Money

U.S. DOLLAR gold bullion prices touched $1623 an ounce Monday morning London time – a 1%
rally from the low hit during Asian trading – before falling back slightly, while stocks, industrial
commodities and major government bond prices all ticked lower.

"[Gold bullion] remains above its 3-year bullish support that now lies at $1544," says technical
analyst Russell Browne at bullion bank Scotia Mocatta.

Prices for silver bullion rose to $29.26 per ounce – 1.9% down on last week's high – while the Euro
rallied against the Dollar in early European trading but couldn't sustain momentum.

"The strength of the Dollar is playing a role in limiting appetite [for commodities]," says Nick
Trevethan, Singapore-based senior commodity strategist at ANZ Bank.

"But Europe is still a basket case and investors are hoping to see more easing out of the European
Central Bank at some point."

Germany successfully auctioned €3.9 billion of 6-month government bills – known as Bubills –
Monday morning. However, the bid-to-cover ratio was down on the previous auction last month,
falling from 3.8 to 1.8.

In addition, some of the bills were sold at negative nominal interest rates – with the average yield
coming in at minus 0.0122%.

Monday's was the first auction at which bidders could bid in terms of price rather than yield.

"Through the submission of price bids with prices above 100 it is possible to submit price bids
reflecting negative yields," said a Bundesbank statement issued before the auction.

In other words, some investors were this morning prepared to pay more than €100 today in order to
receive €100 in June.

Elsewhere in Berlin, German chancellor Angela Merkel is set to have talks with French president
Nicolas Sarkozy today on how to implement tighter budgetary rules agreed at the December 9

"It's important we do start to see some progress," says Goldman Sachs chief European economist
Huw Pill, adding that the Eurozone crisis will not be fixed without "German largesse".

Banks meantime will need to take "substantial haircuts" on their holdings of Greek debt, reckons
International Monetary Fund chief economist Olivier Blanchard. Representatives for the banking
sector agreed to take losses of 50% as part of an agreement reached last October, but their
losses "may have to be larger" Blanchard said Friday.

By contrast, the governor of Cyprus's central bank, Athanasios Orphanides – who is also a member
of the European Central Bank's Governing Council – has called on Eurozone leaders to abandon
plans to impose private sector losses.

"It is a thoroughly inefficient way of dealing with the moral hazard issue that we are still paying
for now," he wrote in Friday's Financial Times, arguing that reversing the decision would reduce
financing costs for other Eurozone countries, even though it would raise them for Greece.

Officials from the European Union and IMF are due to visit Greece on Saturday. Before then, the
ECB will hold its first interest rate meeting of 2012 on Thursday, while Italy and Spain hold bond
auctions on Thursday and Friday.

China's money supply grew by 13.6% in the year to December – more than the consensus analysts'
forecast of 12.9% – following the central bank's decision at the end of November to cut the amount
of cash banks are required to hold relative to their assets, known as the reserve requirement ratio.

A note from economists at JPMorgan this morning says it expects the PBOC to announce three cuts
in the reserve requirement ratio in the first six months of this year.

This prediction follows an interview given by PBOC governor Zhou Xiaochuan to news agency
Xinhua, in which he said the PBOC needs "to be prepared for a poor external environment".
Gold volumes on the Shanghai Gold Exchange – which hit record highs last Wednesday – remained
strong on Monday, traders report.

Chinese Lunar New Year falls on 23 January this year – the earliest since 2004, when it fell on
January 2002. China's banks were last week "on the bid" to buy gold head of Lunar New Year, one
trader noted last week.

In addition, last month China's authorities banned all gold exchanges with the exceptions of the
Shanghai Gold Exchange and the Shanghai Futures Exchange.

Gold bullion, however, "is not cheap in local currencies in Asia," says one Singapore-based dealer,
adding that his firm only saw "light buying" on Monday, although premiums over Spot Prices were
up to $1.70 from $1.30 the week before.

Over in New York, the difference between the number of bullish and bearish contracts held by
noncommercial gold futures and options traders on the Comex exchange – the so-called speculative
net long – fell slightly the week ended last Tuesday at the equivalent of just over 422 tonnes of gold
bullion, the latest data from the Commodity Futures Trading Commission show.

The decline marks the fourth-straight week of falls in the speculative net long, taking it to its lowest
level since April 2009.

"The sustained deterioration in the net position is a signal that the speculative market remains wary
of gold’s prospects, which might explain the failure of gold to sustain upward momentum," reckons
Marc Ground, commodities strategist at Standard Bank.

The rebalancing this week of index funds that track commodity prices could weigh on gold
and silver prices, according to one dealer, who reckons around $5 billion of gold bullion will be

"The rebalancing is mostly but not exclusively a matter of selling the previous year's outperformers

and buying the underperformers to bring the portfolio composure back in line," says a note from
Saxo Bank.

Swiss National Bank head Philipp Hildebrand has resigned over the controversy surrounding his
wife's purchase of US Dollars three week's before the SNB pegged the Swiss Franc to the Euro,
newswires Bloomberg and Reuters reported Monday lunchtime.

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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