Friday, January 13, 2012

Markets "Comfortable Again with Gold", Euro Falls After "Soft" Italian Debt Auction

SPOT MARKET Dollar gold prices dipped to $1637 an ounce Friday morning London time –
a 1.4% fall from Thursday's high – as the Euro fell against the Dollar following a successful-yet-
disappointing Italian bond auction.

In contrast to Dollar gold prices, the gold price in Euros gained throughout Friday morning, hitting
€41,326 per kilo (€1285 per ounce) around lunchtime.

Silver prices dipped to $29.69 – 3.3% below yesterday's peak – while stocks and commodities were
mostly flat and government bond prices gained.

"We feel the market is once again comfortable with gold," says Scotia Mocatta's latest technical
analysis report, "but will liquidate on a break of $1605."

Heading into the weekend, gold prices are up 1.5% in Dollar terms, while on a fortnightly basis
gold is looking at a gain of 4.7%. Based on PM London Fix prices, this would be gold's biggest
two-week gain since the fortnight ended 4 November.

Italy successfully auctioned €4.75 billion of 3-Year government bonds this morning, paying an
average yield of 4.83% - down from 5.62% paid at a similar auction two weeks ago.

"On the whole [however] the auction results are mixed to soft," cautions Rabobank strategist
Richard McGuire, adding they were "certainly far from the humdinger we saw in Spain yesterday."

"It doesn't defeat the notion that the [European Central Bank] extraordinary liquidity provisioning
will support peripheral debt but it perhaps tempers expectations as to what degree these operations
will support."

ECB president Mario Draghi argued yesterday that last month's 3-Year longer term refinancing
operation – at which European banks borrowed close to €500 billion – had averted a potentially
disastrous funding crisis.

"The ECB can be rightly justified in saying that the Armageddon we were facing toward the end of
last year does seem to have been addressed," reckons James Nixon, chief European economist at
Societe Generale.

Speaking at a press conference following the announcement that the ECB would leave interest rates
on hold, Draghi said that "the [ECB's] monetary stance is and will remain accommodative".

"Further rate cuts," says SocGen's Nixon, "will only be forthcoming if, for example, we see signs of
an outright credit crunch."

The decline in the Euro in the second half of last appears to have boosted the Eurozone's trade

The 17-nation Eurozone saw its external trade surplus grow strongly in November – rising to €6.9
billion from €1.0 billion a month earlier – data published Friday by Eurostat show. However, the
full 27-member European Union still ran an external trade deficit of €7.2 billion, though this was
less than half that run in October.

The Euro ended December around 12% below its 2011 peak against the Dollar, and currently trades
around $1.28.

"With a rate of $1.29 or $1.30 ... [the Euro] is still too high," said French president Nicolas Sarkozy
back in January 2011.

Hungary – whose government debt is now rated as junk by all three major ratings agencies –
must show "strong commitment" to economic reform before the International Monetary Fund
will consider opening negotiations on a bailout, IMF managing director Christine Lagarde said
Thursday, following a meeting with Hungarian officials.

"We fully understand and agree with the experts from the IMF," said Tamas Fellegi, the Hungarian
minister appointed to negotiate with the IMF.

Hungary's prime minister Viktor Orban said this morning however that "there are areas where views
differ significantly" between his government and the IMF.

China meantime saw its foreign exchange reserves fall to $3.18 trillion in the fourth quarter of last
year, a period that included the first consecutive monthly fall (in December) since early 2009.

"The decline in foreign exchange reserves in Q4 is consistent with the sharp reversal in capital
flows out of emerging markets in general and the region in particular," reckons Andy Ji, economist
at Commonwealth Bank of Australia.

The news "might also be contributing to gold's downward movement," reckons Standard Bank
commodity strategist Marc Ground.

"This can be explained in terms of the negative effect that a slowing down in Chinese foreign-
exchange reserve accumulation would have on global liquidity and the ability of governments,
especially those of developed nations, to borrow."

Copper and gold provide "the best value opportunities" for investment this year, according to a
report published by Goldman Sachs on Friday.

The Goldman report also argues that there was a "wedge" between gold prices and real interest
rates towards the end of last year. Short-term gold lease rates – the difference between the return on
lending cash and the return on lending gold – were negative for much of 2011, falling towards the
end of the year.

"Demand for US Dollars drove the gold lease rates to unprecedented negative levels as US Dollars
became increasingly more valuable than gold," the report says.

"This new demand for Dollars was mostly from European banks using the gold market to source
US Dollar liquidity when their funding from the US money markets dried up, which created a
significant amount of gold selling."

Ben Traynor