THE PRICE OF GOLD edged lower in London dealing on Thursday morning, ticking back from an overnight rally in Asia as European stock markets also cut early gains.
The US Dollar rose on the currency market after the European Central Bank voted to keep its key interest rate on hold at a record low of 1.0%, despite new data showing both price-inflation and industrial output rising faster than expected in the 16-nation Eurozone.
The gold price in Euros moved in a tight range around €785 an ounce after unwinding two-third of this week’s 2.2% drop.
“The Greek example can put us under great, great pressures,” said German chancellor Angela Merkel at a seminar held by Die Welt newspaper in Berlin last night.
“Who will tell the Greek parliament to please go ahead and pass a pension reform?” she asked. “The Euro is in a very difficult phase over the coming years.”
The European Commission lambasted the Greek government this week after Athens admitted hiding the true extent of its budget deficit – already equal to 12.5% of annual GDP – during last autumn’s emergency audit.
The Euro exchange-rate is closely allied to gold prices for US investors, displaying an average correlation co-efficient of +0.5 over the last 10 years.
That would read +1.0 if gold and the Euro moved perfectly in lock-step together vs. the Dollar.
“The Euro’s main feature will likely remain its function as the anti-Dollar,” says a new report from Goldman Sachs’ London economists.
“The Euro…remains the only true challenger to the Dollar in terms of foreign-exchange reserve currencies.”
But “The US currency is going to remain the main currency in my opinion for a long period of time,” said International Monetary Fund chief Dominique Strauss-Kahn in a speech to Hong Kong’s Trade Development Council on Wednesday, “even if it’s challenged by some others.”
Ahead of a $13 billion auction of 30-year US debt today, bond analysts noted “one big bidder” buying large chunks of the $61bn in new Treasuries issued so far this week.
Overall, some 17% of Wednesday’s 10-year auction went to “direct bids” – meaning institutional buyers who sidestep the usual channel of primary dealers – compared with an average rate of 7%.
A record 23% of Tuesday’s 3-year notes went to direct bids. Previously, they accounted for an average of just 6% of sales.
“It appears to us that someone is trying to hide their apparent interest in owning these auctions from the rest of the market,” says one strategist to the Financial Times.
“It is unusual to see such a spike in the direct bid,” says another, “and I would imagine it is one big bidder.”
In the precious metals market, meantime, leading analysts GFMS Ltd. said Wednesday that gold investment demand overtook jewelry demand for the first time in three decades in 2009.
Global investors doubled their physical purchases to 1,820 tonnes last year, reported GFMS chief executive Philip Klapwijk – the most accurate forecaster of gold prices in the London Bullion Market Association’s 2009 survey.
Jewelry buying, in contrast, fell by almost a quarter to 1,687 tonnes, the lowest level since 1988.
Guessing that a “large amount of money” is now looking to buy gold to defend against sub-zero real interest rates and the continued decline of the Dollar, Klapwijk forecasts a “bumpy” road to new record prices above $1300 in 2010.
Longer-term – and with gold mining producers likely to start selling future production forwards on the derivatives market as they did during the 1990s if prices suffer “a massive correction” in the next two to three years – the gold industry’s reliance on investment demand is “somewhat worrying” said Klapwijk in his Toronto presentation yesterday.
“The market, if you like, has become a bit like a junkie…more and more dependent on bigger and bigger fixes from the investor community.”
Writing today in the China Daily, “The growth potential for the China private gold market is huge,” claim Eric Yuen and Becky Yuen of Hong Kong’s GuocoCapital.
“According to the China Gold Association, China’s average gold holdings per resident stands at less than 3 grams per person, much lower than India’s average of 15 grams per person. So there is still plenty of room for catching up.”
The world’s No.1 gold mining nation as well as top private consumer, China saw its gold output overtake full-year 2008 by November last year, says Zhang Bingnan, vice-president of the China Gold Association. He projects full-year 2009 output at 310 tonnes.
GFMS puts Chinese output at 330 tonnes.
China National Gold Group, the state-owned Gold Mining giant, today raised its reserves estimate above 1200 tonnes in the ground – now the country’s largest domestic mining reserves and four times CNGG’s estimate at end-2006.
South Africa’s official data agency meantime says that the former No.1′s output fell almost 5% last year, pushing it into third place behind China and Australia.
Adrian Ash
for Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com
