Gold rose on Monday, breaking ranks with sharply lower equities and crude oil markets on signs of a worsening euro zone debt crisis as Spain formally requested a financial rescue.
The metal spiked higher after sticking to a range in early trading.
Investors sought refuge in gold as Germany dashed any hope that Europe would issue common euro zone bonds to underpin its single currency after Spain formally applied for bailout loans to capitalize its banks. Cyprus' request for a EU rescue also boosted bullion buying.
Gold's rally was particularly impressive on a day when Wall Street .SPX dropped nearly 2 percent and crude oil prices slid. Trading volume in the metal, however, was light due to jitters ahead of a European Union summit later this week.
"It's obviously a flight to quality, and gold is trading like a currency instead of a commodity. Until gold breaks out of this trading range, I suspect volume is going to remain tepid," said James Dailey, portfolio manager of TEAM Financial Asset Management.
Spot gold was up 0.7 percent at $1,582.89 an ounce by 12:37 p.m. EDT (1637 GMT). Last week, the metal posted a 3.5 percent decline on deflation worries and a lack of aggressive Federal Reserve stimulus.
U.S. gold futures for August delivery gained $17 an ounce to $1,583.90.
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Central bankers are finding it easier to support their economies than to spur expansion as the prospect of Japanese-like lost decades looms across the developed world.
Another round of loosely correlated global stimulus has begun after the Federal Reserve extended its Operation Twist program and counterparts from Japan to Europe consider more monetary easing of their own. The Bank of Israel today joined those injecting stimulus by reducing its benchmark interest rate for the first time in five months, in part to insulate its economy from “potential negative consequences” elsewhere.
The rub is that even as they renew their rescue efforts, policy makers are postponing forecasts for fuller recoveries and run the risk that their latest actions pack a smaller punch. This raises the prospect of longer-term anemic expansion akin to the doldrums Japan has suffered since the early 1990s.
“Japan’s experience shows central banks can mitigate the worst effects of the current environment, but it’s going to be very hard for them to stimulate demand,” said Peter Dixon, global equities economist at Commerzbank AG in London. He predicts a lengthy period of “sluggish growth and high unemployment” in the debt-ridden industrial nations.
The combination of economic weakness and policy indecisiveness leaves Jan Loeys, chief market strategist in New York at JPMorgan Chase & Co., recommending gold and U.S. assets, on the hope of greater quantitative easing, and shying away from peripheral Europe’s bonds and stocks that traditionally benefit from output growth.
Ready for More
Investors should “position for further monetary action, even if it doesn’t do enough,” said Loeys, whose colleagues anticipate worldwide expansion of 1.4 percent this quarter -- the weakest since the end of the 2009 recession.
One drawback is that the central banks with the most ammunition, such as the European Central Bank and some inemerging markets, are hesitant to act, he said. India unexpectedly chose not to reduce its 8 percent benchmark repurchase rate last week, while Loeys notes other developing nations aren’t cutting because their currencies have weakened and they fear creating asset bubbles.
“From a global point of view, those willing to do something probably don’t have a lot of impact, and the rest who can do something are reluctant,” he said.
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Gold prices rose Monday, as investors looked ahead to a European Union summit later in the week and read the metal’s heavy losses last week as an opportunity to get back into the market.
Gold for August delivery gained $18.60, or 1.2%, at $1,585.50 an ounce, hovering around the day’s highs.
The gains follow a mildly positive Friday session that wasn’t nearly enough to lift gold out of the red for the week. The contract ended the week off 3.8%.
“You’ve got some fear buying” as equities trade sharply lower, said Charles Nedoss, senior market strategist with Olympus Futures in Chicago. He also noted short-covering after last week’s losses.
Investors were pessimistic the summit would result in concrete measures to stanch the debt crisis, which took the Dow Jones Industrial Average down more than 1.2% in recent dealings Monday.
The dollar traded stronger, which is typically a negative for oil and other commodities as it makes them more expensive to holders of other currencies. The ICE dollar index recently rose to 82.447 from 82.267 late Friday.
In a weekend note, Societe Generale pointed to fading hopes for a breakthrough at the gathering of EU leaders that gets underway Thursday.
Meanwhile, Nomura Securities trimmed its gold-price target this year. But it kept its view of an overall positive environment, lifting its targets in 2014 and 2015 in what it said was a continuing uptrend in precious-metals prices.
Among the positives, Nomura noted central-bank buying, continuing strong Chinese demand, persistently negative real interest rates, and a growing bunker mentality for those investors who see dark scenarios on the horizon.
“The further deterioration of the economic recovery, enhanced potential for quantitative easing and continued structural problems in the euro zone lead us to believe that gold prices will stay stronger into 2014 and 2015,”.Nomura analysts said in a research brief Monday.
Inflation is a natural consequence of loose government monetary policy. If those policies get too loose, hyperinflation can occur. As gold investors, we'd like to know if the precious metals would keep pace in this extreme scenario.
Hyperinflation is an extremely rapid period of inflation, but when does inflation (which can be manageable) cross the line and become out-of-control hyperinflation? Philip Cagan, one of the very first researchers of this phenomenon, defines hyperinflation as "an inflation rate of 50% or more in a single month," something largely inconceivable to the average investor.
While there can be multiple reasons for inflation, hyperinflation historically has one root cause: excessive money supply. Debts and deficits reach unsustainable levels, and politicians resort to diluting the currency to cover their expenses. A tipping point is reached, and investors lose confidence in the currency.
"Confidence" is the key word here. Fiat money holds its purchasing power largely on the belief that it is stable and will preserve that power over time. Once this trust is broken, a flight from the currency ensues. In such scenarios, citizens spend the money as quickly as possible, typically buying tangible items in a desperate attempt to get rid of currency units before they lose value. This process increases the velocity of money, setting off a vicious cycle that destroys purchasing power faster and faster.
The most famous case of hyperinflation is the one that occurred in Germany during the Weimar Republic, from January 1919 until November 1923. According to Investopedia, "the average price level increased by a factor of 20 billion, doubling every 28 hours."
One would expect gold to fare well during such an extreme circumstance, and it did – in German marks, quite dramatically. In January 1919, one ounce of gold traded for 170 marks; by November 1923, that same ounce was worth 87 trillion marks. Take a look.
Inflation was at first benign, then began to grow rapidly, and quickly became a monster. What's important to us as investors is that the price of gold grew faster than the rate of monetary inflation. The data here reveal that over this five-year period, the gold price increased 1.8 times more than the inflation rate.
The implication of this is sobering: while hyperinflation wiped out most people's savings, turning wealthy citizens into poor ones literally overnight, those who had assets denominated in gold experienced no loss in purchasing power. In fact, their ability to purchase goods and services grew beyond the runaway prices they saw all around them.
One can't help but wonder how the people whose wealth evaporated in Germany during this time felt. In effect, they were robbed by the government – they were on the losing end of a massive transfer of wealth. Of course, there are two sides to the story, as those who held significant amounts of gold and silver were the recipients.
We can't help but speculate about whether most citizens dismissed the idea of inflation during the calm period in 1920-'21. Did respected economists scoff at the idea that Germany could suffer hyperinflation, just before it struck? Did some politicians proclaim that "a little inflation would be good?"
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Consumers made the most of the dip in the price of bullion and mainland China’s gold purchases via Hong Kong hit a record 101.7 tonnes in April, up 62 per cent, reported Bloomberg.
Meantime, the Russian central bank has again increased its gold reserves by 500,000 ounces. Former Russian finance minister Alexei Kudrin said that a full-blown economic and financial crisis in the euro zone is inevitable and will develop within a year.
Russia is clearly buying gold to protect the ruble from devaluations and Russia from an international monetary crisis. China is doing the same both by official gold purchases and by encouraging individuals to buy precious metals.
This is eminently understandable and sensible. It is the antithesis of the argument that central banks have everything under control. They know that is not true and so buy gold themselves.
Their action also marks the transfer of real wealth in a global reset of wealth towards the emerging markets. They are the ones with the growing economies – Russia with its hydrocarbon wealth and China as the workshop of the world.
At first it was the almighty US dollar that everybody in emerging markets wanted. Now they worry that too many dollars are being created by the Fed and the obvious and unavoidable consequence is inflation down the road.
It behoves any investor to follow the smart money, and the nouveau riche nations must have gotten something right. They only want to hold on to wealth that has been hard won for many.
So when the gold price dips as it may well do this summer as global financial markets sell-off and some investors are forced to dump their precious metals because they cannot afford to keep them, expect more record months of buying by China and Russia.
It makes sense to pay as little as possible for the asset class of the future and to get out of the US dollar while the dollar is strong, rather than to wait until it becomes weakened by devaluation and inflation.
Those who have US dollars stuffed into shoe boxes in the emerging markets will be switching in favor of shiny metals that they can see preserving their wealth in the global economic reset that is coming.
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Gold prices firmed in Europe on Friday, the day after posting their biggest one-day decline since February 29, as lower prices tempted some cautious buyers back to the market and as crude oil recovered from 18-month lows.
The metal fell sharply on Thursday after the Federal Reserve disappointed investors by failing to announce a new round of quantitative easing to boost growth in the United States.
Talk that more stimulus measures were on the way, which would maintain pressure on long-term interest rates, keeping the opportunity cost of holding gold at rock bottom and weighing on the dollar, had buoyed the metal earlier this month.
It has since erased the bulk of June’s gains and is on track for its biggest weekly loss since early March.
Spot gold was up 0,3% at $1569,39 an ounce at 10.46 GMT, while US gold futures for August delivery were up $4,60 an ounce at $1570,10. Its modest gains tracked a recovery in crude oil prices from 18-month lows on Friday.
"Since August, September, gold has been trading like any other commodity," Natixis analyst Nic Brown said. "The one thing that will support prices this year is the potential for further aggressive monetary stimulus in the United States, whether it is QE or a new policy."
He said while the Fed had chosen not to pursue aggressive stimulus measures, poor economic data from Europe, China and the United States on Thursday suggested continued pressure for some sort of action to stimulate growth.
"The Fed may be forced into doing something," he said. "The fundamentals in the US may be improving ... but the European situation is managing to drag everyone else down with it."
A Reuters poll on Thursday showed Wall Street’s top bond firms still estimated a 50% chance that the Fed would begin a third round of quantitative easing.
Concerns over global growth remained high on Friday after data showed China’s factory sector shrank for an eighth month, business activity in the euro area contracted and US
manufacturing grew at its slowest pace in 11 months, while riskier assets were knocked by a Moody’s downgrade of the world’s major banks.
European shares extended the previous session’s losses as recent poor economic data raised fresh concerns about the pace of global recovery, while the dollar rose against a basket of currencies, supported by safe-haven flows.
"The recent sell-off (in gold) could well prove to be excessive ... if risk aversion rises again in the coming months," investment bank Fairfax said in a note.
From a technical perspective, gold is seeing good support at $1560, and below that at $1530, analysts who study past price patterns for clues as to the future direction of trade said.
"The price action looks weak, but overall the metal has been contained in this $1528 to $1640 range for two months," ScotiaMocatta said in a note. "A break of $1523, the December low, would see liquidation looking for a bigger move."
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Gold rose back above $1600 an ounce on Tuesday, gathering momentum as it pushed through key levels, while the euro hit session highs against the dollar and other commodities firmed, with copper prices moving higher and crude oil paring gains.
Spot gold was up 0,5% at $1602,45 an ounce at 1.42pm GMT, off an earlier low of $1586,29. US gold futures for August delivery were up $5,30 an ounce at $1591,50.
The euro briefly rose back above $1,25 just before the US open, recovering early losses made on concerns over Spain’s bank bail-out deal and uncertainty after Greek elections this Sunday, although trading was choppy.
"(We had) a small pop higher in the euro and that was it," Saxo Bank vice-president Ole Hansen said. "The market wants to go higher now and it has taken comfort from the fact that buyers returned fairly quickly after the sell-off last week."
Prices fell below $1600 an ounce on Thursday as expectations for a fresh round of potentially dollar-negative quantitative easing in the US, sparked by very weak jobs data, dissipated.
While rising risk aversion in the euro zone has not tended to boost interest in gold as a haven from risk, signs that the economic crisis is having an impact in the US have tended to push prices higher.
"Gold is sitting waiting for something to happen, but I would argue it is waiting for something to happen in the US, rather than Europe," Natixis analyst Nic Brown said. "(We need) more clarity in the US over whether the economic data is going to improve again ... or whether the weakening data is a sign of slower economic growth, and that therefore the Fed will have to do something."
He added: "For me, the focus is definitely on the US side of the Atlantic. In the meantime, gold is going up, down or sideways dependent on what is going on in the euro/dollar rate, and there isn’t a great deal else that is moving it around."
European shares rose in choppy trade on Tuesday, with concerns about knock-on effects from Spain’s banking rescue and unease ahead of Greek elections prompting investors to take refuge in defensive plays such as food and utilities stocks.
CHARTISTS SEE SUPPORT
Technical analysts, who study past price moves to determine the next direction of trade, identify strong resistance for gold near $1609.
Barclays Capital said in a note that it sees near-term support at $1579, and is neutral on gold in the medium term.
"Selling interest near $1650 keeps gold within the seasonal mid-year range," it said. "While $1520 underpins, we look for a move above $1700 to signal further upside toward $1800."
Among other precious metals, silver was up 1,2% at $28,85 an ounce.
Holdings of silver-backed exchange traded funds monitored by Reuters rose by 570000 ounces from June 10 to June 11, Reuters data showed, after an inflow into the Julius Baer Physical Silver fund.
Spot platinum was down 0,1% at $1435,49 an ounce, while spot palladium was down 0,1% at $616,75 an ounce.
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Gold rose for a third consecutive session on Tuesday as physical bullion buying and the accumulation of bullish bets linked to uncertainty over the euro zone debt crisis helped the metal recover from early losses.
Bullion, which veered away from its positive correlation with riskier assets in the previous session, tracked gains in U.S. equities and the euro following their declines on Monday when some investors said the European financial rescue of Spanish banks was too small.
Signs of a worsening European crisis, surging Spanish bond yields and a key election in Greece on Sunday prompted investors to seek refuge in the safe-haven metal. Some bought gold after they digested the $125 million Spanish bailout package which would provide the markets with additional liquidity.
"We've seen demand pick up on the physical side here. Every time we dipped dramatically below $1,600, the market remains well supported," said David Meger, director of metals trading at Vision Financial Markets.
Spot gold rose 0.6 percent to $1,605.10 an ounce by 2:32 p.m. EDT (1832 GMT), its biggest one-day gain since June 1.
U.S. gold futures for August delivery settled up $17 an ounce at $1,613.80, with trading volume about 40 percent below its 30-day average, preliminary Reuters data showed.
Bullion fell earlier in the session after data showed U.S. import prices recorded their largest decline in nearly two years in May, a sign of weakening global demand for goods. [ID:nL1E8HC29G] However, a brief rally in the euro at around 9 a.m. appeared to spark gold's gains.
JITTERS BEFORE GREECE ELECTION
COMEX gold option floor trader Jonathan Jossen said there was strong short-term interest in the COMEX July options which expire in two weeks.
Traders also reported fund buying in deep out-of-the-market calls, other bullish strategies including bull-call spreading and volatility plays such as straddles.
The metal saw some safe-haven bids from jittery investors after Austria's finance minister said Italy may need a financial rescue because of its high borrowing costs, and as Spain's bond yields rose to their highest levels since the euro's launch in 1999.
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