Gold Down Along with Stocks

Spot market gold prices continued falling Monday morning in London, touching $1,701/oz—1.3% down on Friday's close—as the U.S. dollar rallied, despite reports of failure by the congressional 'super committee' to agree on how to tackle the U.S. deficit.

"[Gold] Prices didn't correct enough [last week]," says one dealer in Singapore, adding that gold prices "need to go below $1700 and stay, otherwise people won't buy".

Commerzbank however say they expect to see gold trading at $1800/oz by the end of the year, while Deutsche Bank say in their weekly commodities report they expect periods of risk aversion to remain through 2012 and their strongest conviction trade remains long precious metals and specifically gold.

"In an environment where real interest rates are negative and the U.S. equity risk premium is high we expect this will sustain strong private and public sector demand for gold. However, this week has shown that gold has become more vulnerable to environments where the U.S. dollar is strengthening," DB say, adding that gold would need to rise beyond $2,170/oz to enter bubble-territory.

Silver prices also fell, hitting $31.00—4.3% down on last week's close.

Stock and commodity markets sold off too—with Germany's DAX down 2.5% by lunchtime.

On the currency markets, the U.S. dollar gained against the Euro Sterling and Yen as investors piled into U.S. Treasury bonds—pushing the yield on 10-Year Treasuries below 2%.

Over in Washington, the bipartisan congressional 'super committee'—tasked with agreeing measures to reduce the U.S. deficit by $1.2 trillion over the next ten years—was reported Monday morning to be close to announcing its failure.

"The likely outcome is no agreement will be reached," one anonymous Democratic aide told CNN on Sunday.

"I'll tell you one of the problems," said Democrat senator Patty Murray—who co-chairs the committee.

"A pledge that too many Republicans took to a Republican wealthy lobbyist by the name of Grover Norquist, whose name has come up in meetings time and time again."

Norquist is president of lobby group Americans for Tax Reform. More than 270 Republican lawmakers are said to have signed his pledge promising not to vote for tax increases.

"In Washington, there are folks who won't cut a dollar unless we raise taxes," countered Republican senator John Kyl.

"If you want to get serious about the deficit, our country has to grow economically...you can't grow, if you raise taxes in the middle of a recession."

The super committee was set up in the wake of the summer's debt ceiling debate—which saw the U.S. come within hours of hitting its federal borrowing limit before it was raised. Later the same week, on August 5, ratings agency Standard & Poor's lowered its sovereign credit rating for the U.S. from AAA to AA+.

"The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened," said an S&P statement explaining the August downgrade.

Moody's and Fitch—the two other major ratings agencies—have both maintained their triple-A U.S. ratings. However, "anything that dilutes the deficit reduction that we're now expecting would certainly be a negative in our thinking about the rating," says Moody's vice president Steven Hess.

"As is the case with policymakers in Europe," argues Michael Gapen, senior U.S. economist at Barclays Capital, "U.S. politicians need to be doing more than investors expect, not less."

A failure of the super committee to agree a deficit-cutting plan risks triggering automatic spending cuts of $1.2 trillion. These cuts would start in 2013 and would include spending on defense, education, energy and housing.

"If the automatic cuts are activated then the U.S. will be going through the same austerity that has not proved particularly successful so far in Europe with regards to growth," says Jim Reid, head of global fundamental credit strategy at Deutsche Bank in London.

Here in Europe, Spain's center-right Popular Party won Sunday's general election, defeating the incumbent Socialist Party.

"Hard times lie ahead," Spain's new prime minister Mariano Rajoy said after his victory.

"We are going to govern in the most delicate situation Spain has faced in 30 years."

Yields on Spanish 10-Year government bonds climbed to over 6.5% Monday morning.

Elsewhere in Europe, Moody's has indicated that it may consider changing its outlook for France's credit rating from 'stable' to 'negative'.

"Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications," Senior Credit Officer Alexander Kockerbeck said in Moody's Weekly Credit Outlook dated November 21.

"As we noted in recent publications, the deterioration in debt metrics and the potential for further liabilities to emerge are exerting pressure on France's creditworthiness and the stable outlook (though not at this stage the level) of the government's Aaa debt rating," the Moody's note read.

Over in New York, the number of bullish minus bearish contracts held by noncommercial gold futures and options traders on the Comex exchange—the so-called speculative net long—rose for the fourth week running in the week ended November 15—though at a slower pace than the previous week—according to data published Friday by the Commodity Futures Trading Commission.

The spec long rose 1.4%% to the equivalent of 625.1 tons of gold bullion.

Over, the same period, the volume of gold held to back shares in the SPDR Gold Trust (ticker GLD)—the world's largest gold ETF –grew by 0.3%. However, by Friday last week, the GLD had seen its gold volume grow by nearly 2% from where it stood on Tuesday—during which time gold prices fell by more than 3%.

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.

(c) BullionVault 2011

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