Risk of Contagion Bolsters Gold’s Status as Currency Hedge

Gold
Gold closed at $1089.10/oz last night, having lost 1.36% on the day in dollar terms. Gold recovered in Asian and early European trading this morning and at the moment is trading at $1,093.40/oz. In EUR and GBP terms, gold is trading at €819.21/oz and £730.74/oz respectively . Gold rose in euro terms due to the risk of contagion in the eurozone and remains near record (nominal) highs of €833.54/oz reached on the March 4th (see chart).

Should gold close above the recent record nominal high at €833/oz, there is no chart resistance and traders would look to psychological levels of €850/oz and €900/oz as possible next levels of resistance. Given the real challenges facing the euro, this seems very likely.

Gold in euro (YTD)

The eurozone’s continuing financial problems were further hindered by the downgrading of Portugal’s credit rating by Fitch (to AA- from AA with a negative outlook) which saw the euro fall versus the dollar, gold and some other currencies. Indeed, risk aversion saw equities, commodities, bonds and US Treasuries sell off yesterday as concerns continue about sovereign debt markets and how governments will fund surging budget deficits.

Increasingly frantic and frenetic efforts to contain the real risk of financial contagion continue. The eurozone is ‘not out of the woods yet,’ says EU Economics Commissioner Rehn and the significant fiscal challenges facing the PIIGS  (Portugal, Italy, Ireland, Greece and Spain) look set to keep the euro under pressure for the foreseeable future. The risk of a break up of the euro currency is real and with the euro’s status as an international reserve currency being questioned, gold’s status as an international reserve asset and important currency hedge is being bolstered.

Gold in euro (1 Year)

Zhu Min, deputy governor of the People’s Bank of China  comments  that the Greek debt crisis the “tip of the iceberg” are not helping sentiment in the currency and wider markets. He said that Chinese growth was likely to slow further in March, that China should and could move towards a floating currency regime, and that the Greece debt crisis was only the beginning of a wider global debt problem.

In these historic times, it is important to keep a long term historical perspective. Gold remains well below its inflation adjusted high reached in 1980 in all major currencies. Gold reached some $2,400/oz in inflation adjusted terms in 1980 and well over €1,200 per ounce (DM converted to euro). Thus, given the real risk of international contagion and an international monetary crisis, gold may challenge these inflation adjusted highs in the coming months.

Gold in euro in nominal terms (non-inflation adjusted) 1971-2010

Silver
Silver also ended the day with a loss, dropping 2.24% to $16.60/oz. Silver is currently trading at $16.74/oz, €12.55/oz and £11.19/oz.

Platinum Group Metals
Platinum is at the moment trading at $1,584/oz, palladium at $446/oz and rhodium at $2300/oz.

News
Gordon Brown’s imprudent and short sighted decision to sell some half of all the UK’s gold reserves may become an issue in the coming UK election. The decision taken when he was Chancellor – is increasingly being regarded as one of the Treasury’s worst financial mistakes as it has cost British taxpayers almost £7 billion. Mr Brown and the Treasury have repeatedly refused to disclose any information about the gold sale amid allegations that warnings were ignored. In the event of an international monetary currency crisis, the UK’s now small gold reserves would not aid an embattled pound.

China looks set to be the primary driver of worldwide demand for gold, according to a new report from the Bank of America.  "China’s gold jewellery demand and retail investment will stay healthy in the coming years, which should provide continued support to the global gold market," the report stated. The Chinese government has opened up the investment market for the precious metal, as well as liberalising the jewellery market, allowing more consumers to put their money into gold, the bank’s Merril Lynch analysts said.  Not to mention China’s continuing central bank “stealth” increase in their gold reserves.

UK Chancellor Alistair Darling’s budget has received a mixed response with some thinking it reasonable and others seeing it as unrealistic, imprudent and a missed opportunity to steady the precarious state of the UK finances.

The Commodity Futures Trading Commission (CFTC) is to hear today from GATA who allege that the gold and silver markets are manipulated through large concentrated short positions by Wall Street investment banks. Reuters reports that the advocates for free markets will get a turn in the spotlight because of the hearing. According to GATA’s blog, Bill Murphy’s, the Chairman of the Gold Anti-Trust Action Committee,  invitation to speak at the hearing spurred an explosion of invitations for media interviews.

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Mark OByrne

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