Gold Market Report

U.S. dollar gold prices fell again on Friday, falling to a seven-week low below $1,700 as world stock markets continued to slump—as did industrial commodities—while the zero-yielding Dollar and Yen currencies continued to rally.

Ministers of the G20 group began their weekend meeting to address the Euro crisis. This Sunday marks the 80th anniversary of Great Britain being forced to formally abandon the Gold Standard in 1931.

"Many may well be and some already have been liquidating their gold positions to cover their losses in other sectors, putting downward pressure on gold prices," says a note from Swiss precious metals group MKS.

"A break of $1704 [confirms] a double top is in place," add technical analysts at bullion bank Scotia Mocatta—who now see a move down to $1488 a possibility.

By Friday lunchtime in London, gold prices were looking at their biggest weekly loss for nearly three year, with a 6.8% for the week. Based on Friday-to-Friday London Fix prices, the previous biggest weekly loss was in December 2008.

Silver prices fell to $32.44—20.3% down for the week, and looking at their biggest weekly drop since March 1980.

Stock markets continued to fall despite a brief rally in early European trading. The FTSE fell 2% by early afternoon, dropping through 5000, while Germany's DAX lost 3.2%

Policymakers around the world "commit to take all necessary actions to preserve the stability of banking systems and financial markets as required," according to a joint statement issued Thursday by the finance ministers and central bank governors of the G20 largest economies, who are meeting in Washington.

"We will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks...central banks will continue to stand ready to provide liquidity to banks as required."

"Verbal support without any concrete action is no longer convincing," says Joe Lau, Hong Kong-based economist at Societe Generale.

"Investors are now looking for viable credible actions from policy makers and, given the amount of nervousness and uncertainty out there, that may not even be enough."

"If the situation deteriorates further," World Bank president Robert Zoellick told news agency Reuters, "then developing countries' growth could turn down, their asset prices could drop and then their non-performing loans could increase...we have to anticipate possible protectionist pressures, beggar-thy-neighbour policies and a risk of a retreat to populism."

"This is not the time for go-it-alone measures," warned Pascal Lamy, director general of the World Trade Organization, on Friday.

The WTO cut its 2011 forecast for trade growth to 5.8% today—down from 6.5% projected in April.

"[We] now expect a full blown recession," says a note from Royal Bank of Scotland chief European economist Jacques Cailloux, adding that he expects the European Central Bank will cut interest rates by half a percentage point by November at the latest.

"It is inconceivable that the ECB would stand by whilst euro area banks came under increased pressure and we think the ECB could also announce additional measures to support the system."

"Banks need urgent recapitalization," says International Monetary Fund chief Christine Lagarde, in a piece called How to Save Europe published on news agency Bloomberg's website.

"This is key to cutting the chains of contagion."

The Eurozone needs "the right firewall to prevent contagion", French finance minister Francois Baroin said Thursday, referring to the €440 billion European Financial Stability Facility—the ad hoc bailout mechanism set up last year.

Baroin added that policymakers might use the "power of leverage" to give the EFSF "systemic force"—echoing a suggestion made last week by U.S. Treasury secretary Tim Geithner.

"It is very important that we look at the possibility of leveraging the EFSF," agreed European Union monetary affairs commissioner Olli Rehn on Thursday.

Eurozone leaders agreed on July 21 to grant the EFSF new powers, including the ability to buy government bonds on the open market and recapitalize banks. These powers, however, still need to be approved by national parliaments.

Over in India meantime, the recent drop in gold prices has largely been offset by a weakening Rupee, according to local gold dealers.

"Some buyers are coming in, thinking that gold has become cheaper, but they get disappointed to see that prices are nearly the same," says Girish Choksi, a bullion dealer in Ahmedabad.

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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