The flight to safety yesterday saw gold and US and German government bonds rise while equities fell internationally. Gold’s rise was marginal but was significant all the same given the very sharp falls seen in equity and commodity markets. Gold rose sharply in euros and in the commodity currencies as these currencies came under pressure.
German consumer confidence index for June fell more than expected and the Italian government has imposed austerity measures involving 24 billion euros ($30 billion) in budget cuts. Gold is currently trading at $1,212/oz and in euro and GBP terms, at €985/oz and £842/oz respectively.
Gold in Euros – 5 Years (Daily). Click on image to view full size.
While risk appetite has increased overnight in Asia and in Europe this morning (as seen in buoyant equity markets) it would be wrong to interpret this as a sign that the worst is over. Market sentiment remains fragile with continuing jitters over sovereign debt and currency markets, and over Europe’s banking system. Pan-European sovereign credit default swaps are back to prices not seen since the €750 billion eurozone bailout package. While dollar Libor rose for the 11th day yesterday and euro basis swap figures showed that the cost to swap euros for dollars has now gone to the highest level since December 2008, showing the renewed fragility in the financial system.
Cross Currency Rates as at 1423 GMT Showing Gold’s and Silver’s Strength This Morning. Click on image to view full size.
Gold’s rise this morning is likely due to further safe haven buying on concerns that these risks could lead to contagion. The short term geopolitical risks of the inter-Korea tension were clearly overplayed, however as ever it is important to remain vigilant of the medium and long term risks of a military confrontation in the region.
The economic crisis in the EU is leading to severe political tensions as seen in the head of the European commission, José Manuel Barroso, launching a strong attack on the German chancellor Angela Merkel’s handling of the euro’s crisis of confidence calling her "naïve". Mrs Merkel recently warned that "the euro is in danger…if the euro fails, then Europe fails". Such severe political friction will do little to restore faith in the single currency.
Asian markets were up overnight and this has been attributed to Chinese commodity demand which was forecast by Rio Tinto to grow significantly in the coming 15 years.
Futures Markets Prices at 1423 GMT. Click on image to view full size.
Silver rose in Asian and European trading and is trading at $18.23/oz, €14.42/oz and £12.33/oz.
Platinum Group Metals
Platinum is trading at $1,529/oz and palladium is currently trading at $445/oz. Rhodium is at $2,675/oz.