By Susan Thomas
© Thomson Reuters 2011
LONDON — Gold rose more than 1% on Monday as investors piled into the
traditional safe haven asset as Europe’s debt crisis intensified on
concerns about political instability in Italy and Greece.
Worries about Italy, where Prime Minister Silvio Berlusconi is
battling party rebels threatening to bring down his government, have
overshadowed a coalition deal in Greece to help secure its latest
bailout package.
With Italy’s debt levels at 120% of GDP, the debt problems of the
eurozone’s third-largest economy would pose a much bigger risk to the
financial markets than Greece.
Spot gold touched an intraday high of US$1,775.04, its highest since
Sept. 22, before easing to US$1,772.29 by 1207 GMT, according to Thomson
Reuters data.
U.S. gold rose to US$1,777.20, also its highest in six and a half weeks, before giving up some gains to trade at US$1,775.60.
“The European issue is still very prominently there. So as long as
that remains the case gold is going to remain firm,” said Ross Norman of
Sharps Pixley.
“But even aside from that, there is a general fear factor at the
moment. Clearly there is a lot of fear in the system and gold is doing
what it should do.”
The CBOE Volatility Index, sometimes known as the fear index, fell
1.1% to close at 30.16 on Friday, although it is still up from near 20
in early August.
Investors fear that a disorderly default of an EU sovereign would
trigger losses in creditor banks that could ricochet around the global
financial system much in the same way the bankruptcy of Lehman brothers
hit markets in 2008.
Italy’s borrowing costs have been rising sharply over the past several weeks.
Italian 10-year government bond yields hit 14-year highs of around
6.59% on Monday, lifting their yield premium over benchmark German Bunds
to their highest since 1995.
“The issue, which people are very focussed on at the moment are the
Italian senior bond rates,” said Norman. “When the Greeks got to 7% they
ran up the (white) flag. With Italy at 6.6, we’re getting very close to
the line.”
The MF Global bankruptcy and its aftermath also depressed activity in markets, traders said.
Money managers, including hedge funds and other large speculators,
raised their bullish bets in gold futures and options in the week to
Nov. 1 as the price of bullion surged to its highest in five weeks,
above US$1,750 an ounce, data on Friday showed.
A surprise interest rate cut by the European Central Bank last
Thursday also helped gold to post its second consecutive weekly gain
last week.
“We still believe that precious metals are currently the commodity
sector with the best prospects,” Credit Suisse said in a note. “Precious
metals tend to perform best when interest rates are low and falling. As
a result, the ECB rate cut should help the sector.”
Investors will watch this week for China’s inflation numbers, due on
Wednesday. Annual inflation is expected to ease to 5.5% in October.
“Somewhat counter-intuitively we think that lower inflation numbers
would be supportive for gold, as lower inflation would give the Chinese
central bank more room to manoeuvre and fine tune monetary policy as
announced previously,” Credit Suisse said.
Holdings of the SPDR Gold Trust (GLD), the world’s biggest
gold-backed exchange-traded fund, gained 1.513 tonnes on the day to
1,245.064 tonnes by Nov. 4, the highest in more than a month.
Gold prices have found good support on the downside from physical
demand with interest emerging from the festival season in India as well
as China, though volumes have slowed, Barclays Capital said in a
research note.
Silver was up 1.1% at US$34.48 from US$34.10, platinum was
US$1,634.74 from US$1,630.16, and palladium was US$655.47 from
US$651.28.
© Thomson Reuters 2011