After gold prices regained considerable ground and broke the $1800 barrier they have now slumped back to below $1700 following heightened Euro zone concern, a disappointing Spanish bond auction and record breaking yields in Italy, Spain and Belgium.
The auction saw the Spanish government pay 6.97% for £3.56 billion (a fraction of what it needed to raise) of 10 year Spanish bonds, up from 5.43% when they last auctioned 10 year bonds in October.
Gold has failed to act as a traditional safe haven asset amidst the deepening Euro Zone crisis and instead dropped with equities and other risk assets. This was somewhat due to investors being forced to sell gold in order to obtain Dollars or invest in US Treasuries. The Euro weakness also continues to undermine gold, as the Dollar strengthens and gold becomes more expensive.
At the moment the gold market is tricky to predict because the factors pressuring gold prices would normally be driving investors to buy gold, not liquidate. Â However, if the ECB is forced to launch quantitative easing we could see gold rally. Â Gold has also become increasingly sensitive to environments where the US Dollar is strengthening
In the long-term the outlook for gold is bullish; the solution to the world's debt problems will probably be inflationary and that's good for gold investment. Demand for bullion is likely to remain high as long as real interest rates remain negative and the risk premium on US equities remains high.
After the US government's announcement on Monday that its "Super" committee had failed to meet its target of $1.2 trillion in deficit cuts, confidence in the US and stocks fell. Gold could well benefit from the US deficit problems if attention is now drawn away from the Euro Zone to the US. If combined with a decline in the Euro, gold could well rally.
On Wednesday, European Commission president Jose Manuel Barroso launched a consultation on whether the 17 euro zone countries could issue joint stability bonds. The creation of joint bonds would lead to the stronger nations in the EU supporting the weaker ones but it would supposedly reduce the borrowing costs for all. However, EU nations would need to pledge part of their foreign exchange holdings or gold reserves as security and this has been written off as an absolute no by the Chancellor of Germany, Angela Merkel.  The US, the UK and Asia are all calling for more solidarity and consensus within the Euro Zone, which raises the question how much longer can they put off the inevitable? Â
It has been accepted that it is up to Germany to save the Euro, either by letting the ECB print money or issuing join bonds. However on Wednesday, Germany sold just 3.6bn Euros ($4.8bn; £3bn) worth of 10-year bonds, from 6bn Euros on offer. Markets were certainly rattled by this but bond auctions fail all the time. The problem is far more money was retained than normal and it's a big indicator that people aren't so willing to lend money to Germany anymore, whereas the UK and US are still attracting investors. The problem is that even with its yield of 1.98% (far lower than Italy or Spain) Germany is still part of the Euro and investors are becoming increasingly concerned about investing in a currency that could fall apart. The Euro Zone story is going to run and run and it's not going to end until the weaker countries leave the Euro Zone or Germany lets the ECB print money.
Right now investors are liquidating to buy US treasuries and invest in US Dollars; however this isn't expected to last long, once liquidity is satisfied we will see investors once investing in gold.
The auction saw the Spanish government pay 6.97% for £3.56 billion (a fraction of what it needed to raise) of 10 year Spanish bonds, up from 5.43% when they last auctioned 10 year bonds in October.
Gold has failed to act as a traditional safe haven asset amidst the deepening Euro Zone crisis and instead dropped with equities and other risk assets. This was somewhat due to investors being forced to sell gold in order to obtain Dollars or invest in US Treasuries. The Euro weakness also continues to undermine gold, as the Dollar strengthens and gold becomes more expensive.
At the moment the gold market is tricky to predict because the factors pressuring gold prices would normally be driving investors to buy gold, not liquidate. Â However, if the ECB is forced to launch quantitative easing we could see gold rally. Â Gold has also become increasingly sensitive to environments where the US Dollar is strengthening
In the long-term the outlook for gold is bullish; the solution to the world's debt problems will probably be inflationary and that's good for gold investment. Demand for bullion is likely to remain high as long as real interest rates remain negative and the risk premium on US equities remains high.
After the US government's announcement on Monday that its "Super" committee had failed to meet its target of $1.2 trillion in deficit cuts, confidence in the US and stocks fell. Gold could well benefit from the US deficit problems if attention is now drawn away from the Euro Zone to the US. If combined with a decline in the Euro, gold could well rally.
On Wednesday, European Commission president Jose Manuel Barroso launched a consultation on whether the 17 euro zone countries could issue joint stability bonds. The creation of joint bonds would lead to the stronger nations in the EU supporting the weaker ones but it would supposedly reduce the borrowing costs for all. However, EU nations would need to pledge part of their foreign exchange holdings or gold reserves as security and this has been written off as an absolute no by the Chancellor of Germany, Angela Merkel.  The US, the UK and Asia are all calling for more solidarity and consensus within the Euro Zone, which raises the question how much longer can they put off the inevitable? Â
It has been accepted that it is up to Germany to save the Euro, either by letting the ECB print money or issuing join bonds. However on Wednesday, Germany sold just 3.6bn Euros ($4.8bn; £3bn) worth of 10-year bonds, from 6bn Euros on offer. Markets were certainly rattled by this but bond auctions fail all the time. The problem is far more money was retained than normal and it's a big indicator that people aren't so willing to lend money to Germany anymore, whereas the UK and US are still attracting investors. The problem is that even with its yield of 1.98% (far lower than Italy or Spain) Germany is still part of the Euro and investors are becoming increasingly concerned about investing in a currency that could fall apart. The Euro Zone story is going to run and run and it's not going to end until the weaker countries leave the Euro Zone or Germany lets the ECB print money.
Right now investors are liquidating to buy US treasuries and invest in US Dollars; however this isn't expected to last long, once liquidity is satisfied we will see investors once investing in gold.