“Desperate” Central Banks “Should Benefit Gold”, German Court Backs Bailout Fund

Gold prices touched a new six-month high at $1,746 an ounce Wednesday morning. Silver also traded higher at $34.16 an ounce, also a six-month high, following a ruling by Germany's Constitutional Court that cleared the way for the creation of a permanent Eurozone bailout fund.

By BullionVault
September 12th, 2012
247 Bull

The spot market gold price touched a new six-month high at $1746 an ounce Wednesday morning, while stocks and the Euro also rallied following a ruling by Germany’s Constitutional Court that cleared the way for the creation of a permanent Eurozone bailout fund.

“The price action remains bullish with support at $1700 and an upside target of $1790,” says the latest technical analysis from bullion bank Scotia Mocatta.

The silver price meantime traded as high as $34.16 an ounce – also a six-month high – while other commodities were broadly flat.

Ahead of tomorrow’s Federal Reserve decision, analysts continue to speculate on whether the Fed will announce more quantitative easing (QE), with one suggesting the Fed could show itself to be “desperate” and another predicting central banks could be about to open the floodgates.

On the currency markets, the US Dollar Index, which measures the Dollar’s strength against a basket of other currencies, fell below 80 for the first time since May yesterday, following a ratings update from Moody’s that warned the US could lose its Aaa rating next year if legislators fail to agree measures “that produce a stabilization and then downward trend” in the US debt-to-GDP ratio.

The Euro meantime hit a four-month high against the Dollar this morning, trading above $1.29 after Germany’s Constitutional Court rejected challenges to the legality of Germany’s ratification of the European Stability Mechanism and European fiscal pact.

In its preliminary ruling, the Court added however that Germany’s liability for the ESM should not exceed the €190 billion already pledged, with any increase requiring approval by the Bundestag.

“Taking full account of all elements of the ruling, I look forward to the completion of the outstanding procedures allowing for the Treaty Establishing the European Stability Mechanism to enter into force,” Jean-Claude Juncker, head of the Eurogroup of single currency finance ministers, said this morning, adding that ESM governors will meet for the first time on October 8.

The European Central Bank last week announced a program of unlimited secondary market government bond purchases, aimed at reducing differences between sovereign borrowing costs across Eurozone members. A condition of this program is that the ECB will only buy the debt of governments that have entered into an adjustment program that includes “the possibility of EFSF/ESM primary market purchases” – meaning a country must have sought assistance from the ESM or its temporary predecessor the European Financial Stability Facility.

Elsewhere in Europe, Dutch voters go to the polls today in the Netherlands general election, while Spanish prime minister Mariano Rajoy has repeated his assertion that Spain may not need a bailout. Rajoy made similar comments earlier this year regarding assistance for the Spanish banking sector, before his government agreed a €100 billion credit line in June.

In the US, the Federal Open Market Committee begins its latest two-day meeting today, which culminates with a policy announcement tomorrow.

“Central banks are increasingly threatening unlimited action in order to force the market to take heed,” says Steve Barrow, head of G10 research at Standard Bank, citing the examples of the ECB as well as Switzerland’s central bank, which for a year has enforced a floor of SFr1.20 against the Euro after pledging to create an unlimited amount of Swiss currency.

“The SNB and ECB have shown themselves to be desperate,” says Barrow.

“Will the Fed do likewise tomorrow? It’s a long shot but we should not ignore the direction in which global central banking is moving.”

“[Gold has] priced in fairly substantial expectations for QE,” adds Nick Trevethan, Singapore-based senior commodity strategist at ANZ.

“Markets are setting themselves up for disappointment,” warns Jeffrey Christian, managing partner of commodities consultancy CPM Group, adding that his firm is advising short-term clients to buy put options on gold and gold equities. A put option benefits if the price of the underlying asset falls.

“We don’t think that you’ll see any major action until after December.”

“One reason for waiting,” says Michael Hanson, senior US economist at Bank of America in New York, “would be if the Fed is thinking of structuring [QE] not as a fixed quantity but as a more open- ended plan, but they don’t have the details together yet and don’t have consensus on how to do that.”

“The Euro bailout measures and the opening of the monetary policy floodgates by the central banks are likely to result in higher inflation in the medium to long term,” says today’s Commerzbank commodities note.

“[This] should benefit gold in particular as a store of value and alternative currency.”

Over in China, the world’s second-biggest gold buying nation in 2011, there is “ample strength” and room for further measures to support growth, Chinese premier Wen Jiabao said Tuesday.

Last week, China announced 1 trillion Yuan of infrastructure spending, although some analysts argue that fears of inflation and asset bubbles may reduce the scope for a larger stimulus package.

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