Gold Could Gain from "Aggressive Monetary Policy"

THE WHOLESALE market gold price hovered in a 0.5% range around $1711 an ounce Tuesday morning in London, where Britain's chancellor today gave his autumn budget statement to parliament.

Elsewhere in Europe, Italy's borrowing costs hit new highs at an auction of government bonds, while Eurozone finance ministers are meeting to discuss boosting the single currency rescue fund.

 By Tuesday lunchtime, the spot market gold price was showing a gain of 1.7% on last week's close.


"In the short term [however], we fear gold could go a bit lower," warns Daniel Briesemann, analyst at Commerzbank in Frankfurt.

"But this would be exclusively driven by weaker equity markets and weaker commodity markets, because of the increasing risk aversion."

"We remain bullish on gold," says Societe Generale commodities strategist Jeremy Friesen in Hong Kong, adding that "aggressive monetary policy" aimed at countering ongoing crises "will be positive" for the gold price in 2012.

The silver price meantime hovered around $31.80 per ounce – 1.7% up for the week so far – while stocks, commodities and US Treasury bonds were also broadly flat by Tuesday lunchtime.

Britain's government is facing bigger budget deficits than previously forecast, after the Office for Budget Responsibility revised down its growth projections.

"Two more years of weak productivity growth would increase the structural deficit by close to £30 billion," the Financial Times reports, citing its own analysis of Britain's public finances.

The OBR now forecasts that growth for this year will be 0.9%, with 2012 seeing growth of 0.7%. The forecasts mean it looks unlikely the government will hit its target of eliminating the deficit by 2015.

In his Autumn budget statement today, Britain's chancellor George Osborne told confirmed so-called 'credit easing' plans to provide £40 billion to underwrite loans to small and medium sized business. Osborne also restated the government's opposition to a proposed European financial transaction tax. Public sector workers – many of whom plan to strike tomorrow over pensions – will have salary increases capped at 1%.

UK money supply meantime increased by £8.5 billion in October, according to the Bank of England's preferred money supply measure M4 excluding intermediate and other financial corporations – a year-on-year rise of 2.8%.

M4 Sterling lending meantime – the total amount of money lent out to households, private non-financial firms etc. – rose by £5.6 billion, with UK mortgage approvals hitting their highest level since December 2009. The Bank announced on October 6 that it was increasing the size of its quantitative easing program from £200 billion to £275 billion.

The Sterling gold price fell throughout Tuesday morning, losing 0.8% by lunchtime to hit £1095 per ounce – just above where it began the week – as the Pound gained strongly against the Euro.

Despite yesterday's promotion of 'Buy a Bond' day by the Italian Banking Association, Italy's borrowing costs rose to fresh Euro-era highs this morning when it auctioned 3-Year and 10-Year government bonds. The average yield on €2.5 billion of 10-Year bonds sold was 7.56% – while the 3-Year average yield was higher at 7.89%.

Greece, Ireland and Portugal were all facing lower borrowing costs when they were forced to ask for bailouts.

"Italy has lost control of its fate and its future now lies with the European Central Bank, International Monetary Fund, France and Germany," says Jeffrey Sica, president and chief investment officer at SICA Wealth Management, which manages over $1 billion in client assets.

In Brussels meantime, Eurozone finance ministers are meeting today to discuss options for leveraging the European Financial Stability Facility, while in Karlsruhe, the German Constitutional Court is reviewing whether or not Germany's entire parliament will need to vote on any EFSF proposals.

"It's not just Germany that has a parliament," Jean-Claude Juncker, Luxembourg prime minister and chairman of the Eurogroup of single currency ministers, commented last month.

"They also exist elsewhere...we are dealing with 17 governments, 17 states and 17 parliaments."

Ratings agency Moody's announced Tuesday that has placed 87 banks in 15 European countries on review for possible downgrade. The majority of ratings to be reviewed are those of banks in Spain, Italy, Austria and France.

Over in New York, the number of bullish minus bearish contracts held by noncommercial gold futures and options traders on the Comex exchange – the so-called speculative net long – fell in the week ended 22 November, according to data published Monday by the Commodity Futures Trading Commission.

Speculative net long positions fell 12.3%, and by the equivalent of around 78 tonnes of gold bullion.

"The substantial decline in speculative longs is disquieting," says Standard Bank commodities strategist Marc Ground.

"However, we are comforted that this decline in longs has not been accompanied by a marked increase in short positions, a signal that the market has not turned bearish."

"In the week under review," adds precious metals consultancy VM Group, "bets appear to be forming against the gold price. That said, news flow remains the single biggest driver and sentiment can change rapidly. Moreover, much of the fall in the net long position was due to option expiry for December month."

By Ben Traynor
BullionVault.com