Gold Falls on Black Friday

U.S. dollar gold prices looked set for a second weekly drop in a row Friday lunchtime, after falling as low as $1672 an ounce—7.2% down on the November high—while stocks, commodities and government bond prices also lost ground as Belgium became the latest country to be sucked into the European sovereign bond crisis.

New York's Comex gold futures exchange will close early today—having been shut for Thanksgiving yesterday—as U.S. shoppers hit the stores in search of Black Friday discounts.

Heading into the weekend, dollar gold prices looked set for a loss of nearly 3% on the week.

"There are two factors which are putting downward pressure on gold," says Standard Bank commodities strategist Walter de Wet. "The first is weak emerging market currencies in general, and the Indian Rupee in particular. The second is funding stress in Europe."

In spite of this morning's fall in gold prices, "we still haven't seen any significant physical demand coming through," de Wet adds.

"I think sentiment in the physical side is not that bearish," says one Hong Kong trader.

"But the funds are more cautious because of fears of recession. . .[they] are worried that their clients will redeem assets to get more cash on hand."

Silver prices also fell, hitting $31.10 per ounce—and headed for weekly loss of around 4%.

On the stock markets, by Friday lunchtime both the UK's FTSE and Germany's DAX looked to be heading for their tenth straight daily loss—down 0.4% and 0.5% respectively.

Dexia—the Franco-Belgian bank whose Belgian division was nationalized last month—is drawing down emergency liquidity funds from central banks in Belgium, France, Italy and Spain, news agency Reuters reported Thursday.

Dexia is waiting for the governments of Belgium, France and Luxembourg, which last month pledged to guarantee €90 billion of the banking group's borrowing for ten years, to finalize the arrangement.

Yields on 10-Year Belgian government bonds rose to 5.81% this morning—up from 3.6% at the start of October.

"I think Belgium will be included in the ECB buying program," one trader told Reuters.

"I don't see how they can avoid it now that yields are getting up towards 6%."

Elsewhere in Belgium, "another [European Central Bank] rate cut will likely follow. . .if the current [economic] trends continue" Belgian central bank governor Luc Coene, who is also on the ECB's 23 member Governing Council, said Friday, Belgian newspaper De Tijd reports.

Coene also reportedly saidthe ECB's policy of buying distressed sovereign bonds on the open market is not sustainable.

"The markets would notice that ECB has a lot of Italian and Spanish paper on its balance sheet and they would lose confidence in the ECB," De Tijd quoted Coene.

French and German leaders will seek a "positive compromise" on the question of what role the ECB should play in resolving the sovereign debt crisis, French president Nicolas Sarkozy said yesterday.

Sarkozy, who held talks with German chancellor Angela Merkel and Italian Prime Minister Mario Monti, said that he and Merkel have agreed to refrain from discussing the matter publicly.

"The three of us have indicated that we will respect the independence of this essential institution and we agreed that we should refrain making any demand, positive or negative, on it," Sarkozy said.

French finance minister Francois Baroin has previously called for a "solid firewall" with ECB backing to prevent contagion. Merkel said earlier this month that any politicians who believe the ECB can solve the Euro crisis were "trying to convince themselves of something that won't happen."

"We must take steps toward a fiscal union," Merkel said yesterday.

Italy successfully auctioned €8 billion worth of 6-month Treasury bills Friday morning. The average yield, however, was 6.504%, the highest since August 1997, and up from 3.535% at the last 6-month T-bill auction on October 26.

Ratings agency Moody's meantime issued its latest sovereign downgrade late Thursday, when it cut Hungary's rating one notch from Ba1 to Baa3, sending Hungary's bonds into 'junk' territory.

Over in India, total silver bullion imports for 2011 are expected to come in slightly lower than last year's 3030 tonnes , according to a senior bullion bank executive.

"Silver business [by volume] is not that significant," Rajan Venkatesh, managing director, India bullion at Scotia Mocatta told reporters Thursday.

2011 Indian gold imports, by contrast, could rise to 1000 tonnes, Venkatesh says, despite Rupee gold prices hitting record highs this month.

Since the start of the year, the Rupee has fallen 15% against the dollar, hitting an all-time low earlier this week.

The value of India's gold consumption last year was approximately 2.5% of 2010 gross domestic product, according to BullionVault calculations based on World Gold Council and International Monetary Fund data.

India's current account deficit last year was $49.0 billion—3.2% of GDP—according to the IMF. IMF projections forecast that this will grow to $62.5 billion for 2011—3.7% of GDP.

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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