Gold, Stocks and Euro All Down after China Manufacturing News, Bullion Refiners “Stocking Up” for Europe but Concerns Over Liquidity “Cap Upside” for Gold
PRICES TO buy gold bullion on the wholesale market dropped to $1630 an ounce during Monday morning’s London session – a 2.3% drop from where they started the month – while stock markets and industrial commodities also traded lower following the release of preliminary Chinese manufacturing data.
“Gold remains in a short-term bear channel,” say technical analysts at bullion bank Scotia Mocatta.
“We would expect a test of support from the long-term uptrend…[which] comes in around $1600.”
Silver bullion dropped to near 3-month lows, hitting $31.09 per ounce ahead of the US session.
Ahead of the Federal Reserve meeting which starts tomorrow, the US Dollar gained against the Euro, despite news that the International Monetary Fund has almost doubled its effective crisis-lending capacity.
European stock markets sold off heavily, with the UK’s FTSE down 1.7% by lunchtime, and Germany’s DAX off 2.7%.
Activity in China’s manufacturing sector has continued to contract this month, according to data published Monday. The HSBC purchasing managers index (PMI) for this month came in at 49.1 – up from 48.3 for March (a figure below 50 indicates sector contraction).
The slight rise in the PMI figure “suggests that the earlier easing measures have started to work and hence should ease concerns of a sharp growth slowdown,” according to HSBC’s Chief Economist for China Qu Hongbin.
“The pace of both output and demand growth [however] remains at a low level in an historical context and the job market is under pressure. This calls for additional easing measures in the coming months.”
The international community has pledged a total of $430 billion in additional IMF contributions – a move that would almost double the Fund’s lending capacity – IMF managing director Christine Lagarde revealed at the IMF’s Spring Meetings, which ended at the weekend. The US however declined to increase its contribution.
IMF money will not be earmarked for any particular country, an official statement said, although its latest World Economic Outlook last week carried a section on sovereign funding stresses in the Eurozone.
The report advises that the European Central Bank “should lower its policy rate while continuing to use unconventional policies to address banks’ funding and liquidity problems.”
“None of the advice of the IMF has been discussed by the Governing Council,” said ECB president Mario Draghi on Friday.
The government debt of Eurozone nations rose to a Euro era high of 87.2% of gross domestic product last year – up from 85.3% a year earlier – according to official European Union data published Monday.
Reports on Monday morning suggested Netherlands prime minister Mark Rutte was on the verge of resignation, after the Freedom Party walked out of talks on austerity measures and said it was ending its agreement to support Rutte’s minority government. The Netherlands is expected to record a government deficit of 4.6% of GDP this year, compared to a target of 3%.
Over in France meantime, Socialist Party candidate François Hollande led the first round of the French presidential election, the results of which were announced Sunday. Hollande received 28.6% of the vote, compared to 27.1% received by incumbent Nicolas Sarkozy. Marine Le Pen, leader of Front National, came third with 18.1%.
“The first round may offer a glimmer of hope for Sarkozy,” says Holger Schmieding, chief economist at Berenberg Bank.
“But it also entails a risk that he could pander to right-wing sentiment on European issues in the next two weeks. Stronger calls for a ‘growth mandate for the ECB’ and the like may not go down well in Berlin and Frankfurt.”
Calls for economic growth as well as price stability to form part of the ECB’s mandate have become a campaign issue in the French election, and form part of Hollande’s manifesto.
Gold bullion refiners have been stocking up on small gold bars popular with European gold buyers, in preparation for an escalation in the Eurozone crisis, according to John Dizard at the Financial Times.
“Somewhere near Geneva airport,” writes Dizard, referring to a major hub of the gold refining industry, “candles are being burned in front of the image of François Hollande. I think that simple faith will be rewarded soon.”
However, “concerns over Europe are capping [gold's] upside,” says Tobias Merath, head of global commodity research at Credit Suisse.
“The situation in Europe has the potential to lead to deteriorating liquidity conditions…as we saw at the end of last year, gold is a hedge against all kinds of crises, but not against a liquidity problem, when people are liquidating assets to raise much-needed cash. They also sell gold in this environment.”
On New York’s Comext exchange meantime, the difference between bullish and bearish contracts held by noncommercial gold futures and options traders – the so-called speculative net long – rose 2.2% in the week ended last Tuesday, according to Commodity Futures Trading Commission data published late Friday.
Although spec long positions fell by the equivalent of almost 11 tonnes of gold bullion, noncommercial Comex traders reduced their aggregate short exposure by nearly double that, with short positions falling by the equivalent of 20.7 tonnes.
“While investors are not overly bullish,” says Standard Bank commodities strategist Marc Ground, “the drop in short positions is somewhat encouraging as a sign that investors are cautious of running too short.”
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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