Gold "Building a Base above $1,650"

Wholesale prices for gold bullion climbed to $1,679 an ounce Friday morning London time—0.7% down on Wednesday's high for the week—before easing back, as industrial commodities rallied and stocks edged up, while government bond prices fell.

Silver bullion climbed to $32.31 per ounce—3.6% up on last week's close—before it too fell back.

"Quiet market today in terms of flow," says one gold bullion dealer in Hong Kong.

"Gold for the moment continues to base build above the $1,650 level," adds Swiss precious metals refiner MKS.

"It remains underpinned by strong seasonal physical demand and retail investment interest. In the short-term however, the metal still has to overcome resistance above the $1,685 mark before more bullish sentiment manifests itself."

Heading towards the weekend, gold bullion looked set for a 2.1% weekly gain by lunchtime in London. This would be the biggest weekly since the week ended 2 September—although six weeks ago an ounce of gold bullion cost over 10% more than it does today.

Economic policymakers from the world's largest economies are considering expanding the size of the International Monetary Fund—possibly through contributions from emerging market countries—to prepare it for future crises, news agency Bloomberg reported Friday.

Christine Lagarde, IMF managing director, warned last month that the $390 billion at the Fund's disposal may not be enough to meet all future loan requests.

The emerging market BRICS economies—Brazil, Russia, India, China and South Africa—are reported to be in favor of contributing, according to newswire Reuters.

Last month saw speculation that China was preparing to buy significant sums of distressed Eurozone sovereign debt, following a meeting between Chinese officials and Italy's finance minister Giulio Tremonti.

However, "if emerging economies and the BRICS are called upon to contribute, we can do it via the International Monetary Fund," Reuters quoted one anonymous source this morning.

"India is open to it, China and Brazil are also okay with the idea as well."

"Emerging markets, in particular China, may feel the pressure at this point to make some gestures to help the West," reckons Credit Agricole strategist Dariusz Kowalczyk in Hong Kong.

"They do not want to invest too much given that the West's problems are of its own making, and if they help, they want to do so in a way that brings them benefits and recognition."

"The very idea that capital-rich Europe needs help from capital-poor BRIC nations to fund itself verges on the absurd," says Michael Pettis, finance professor at Peking University's Guanghua School of Management.

"European governments are unable to fund themselves not because Europe needs foreign capital. It has plenty. They are unable to fund themselves because they have unsustainable amounts of debt, a rigid currency system that will not allow them to adjust and grow, and the concomitant lack of credibility."

Europe's leaders have been "behind the curve" for the last few years, South Africa's finance minister Pravin Gordhan said in a speech today ahead of the G20 meeting.

"We would be looking forward for assurances from our European colleagues that by the time the summit of the G20 takes place [on 3-4 November] we will have a clear message that will create confidence that Europe is dealing with its issues."

Gordhan added that neither the IMF nor the €440 billion European Financial Stability Facility would have adequate resources were the debt crisis to spread further, and that South African assistance "all depends on how the EFSF is leveraged."

Elsewhere in Europe, ratings agency Standard & Poor's has downgraded Spain's debt from AA to AA-.

"All advanced economies are being x-rayed by the present crisis," says outgoing European Central Bank president Jean-Claude Trichet in an interview in today's Financial Times.

"It's true for all of us—for Japan, for the U.S., for Europeans."

German banks meantime are preparing to lose up to 60% on their holdings of Greek bonds, according to a Bloomberg report that cites unnamed sources. Luxembourg's Prime Minister Jean-Claude Juncker, who chairs the Eurogroup of single currency finance ministers, said earlier this week that Greek debt losses could be even higher than this.

Gold bullion will be "increasingly used as the line of defense against negative market outcomes," says a note from UBS, citing "ongoing global macroeconomic disappointments" and "the inevitability of further negative turns in the European sovereign debt crisis."

Ben Traynor
BullionVault

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.

(c) BullionVault 2011

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