Gold Steady as Dollar Hits Two-Month Low

Wholesale market prices for gold bullion held steady just below $1,750 per ounce Wednesday morning in London—a 2.2% gain on yesterday's low—after rallying Tuesday following comments from U.S. Federal Reserve chairman Ben Bernanke.

Silver bullion eased slightly this morning after hitting $34.55 per ounce—its highest level since November 16.

"Gold faces significant resistance at $1,766, but above that look for $1,778–1,798," says one gold bullion dealer here in London.

The S&P 500 hit its highest level in over six months Tuesday at 1349.24—25% up on last October's low.

Gold bullion meantime is up 9.6% over the same period.

"I'm very bullish on the [stock] market," says Laurence D. Fink, chief executive at world's largest money manager BlackRock.

"I don't have a view that the world is going to fall apart, so you need to take on more risk. You need to overcome all this noise and there are great values in equities."

Despite official figures showing that the unemployment rate fell to 8.3% last month, down from 8.5% in December, the U.S. still has "a long way to go before the labor market can be said to be operating normally," Federal Reserve chairman Ben Bernanke told the Senate Budget Committee Tuesday.

"Bernanke did not give any indication that the Friday job market report is changing the fundamental way [Fed policymakers] are viewing the economy," says Dean Maki, chief U.S. economist at Barclays Capital.

"It is going to take a number of favorable reports before their view on monetary policy shifts."

The U.S. Dollar Index, which measures the U.S. dollar against a basket of other major currencies, hit a 2-month low Wednesday morning.

Elsewhere in Washington, talks on extending payroll tax cuts and unemployment benefits stalled in the Senate Tuesday. Around 160 million people will see their taxes rise if the cuts, which expire March 1, are not extended. Three million meantime could lose unemployment benefits from the same date if they too expire.

There was still no agreement Wednesday lunchtime among Greek leaders regarding austerity reforms required as part of Greece's €130 billion second bailout. A meeting of senior Greek politicians was postponed for the second day running Tuesday, with some reports citing missing paperwork as the cause of the delay.

Leaders have agreed in principle to spending cuts equivalent to 1.5% of GDP, Greek Prime Minister Lucas Papdemos has said, but a formal reform deal remains elusive.

"[Even] if Greece were to agree on everything right away," says Societe Generale commodity strategist Jeremy Friesen, "I don't think it would solve everything because they will still have to implement the measures. . .there are plenty of land mines left."

"No to medieval labor conditions!" chanted protesters outside the Greek parliament during Tuesday's 24 hour strike.

"It is in our interest for Greece to remain [in the single currency]," Dutch Prime Minister Mark Rutte said Tuesday.

"But if that does no work out, then [the other euro members] are stronger now than a year-and-a-half ago."

Rutte's comments echo those of his compatriot Neelie Kroes, a European Commissioner, who told a Dutch newspaper this week that it is "simply not true" that the "entire edifice" of the single currency would collapse were Greece to leave.

German chancellor Angela Merkel however warned yesterday that a Greek exit would have "unforeseeable consequences."

"I will have no part in forcing Greece out of the euro," she told some young people in a Berlin museum.

The European Central Bank meantime has agreed to exchange its Greek bonds, bought on the secondary market as part of the ongoing Securities Market Program, at below face value, according to a Wall Street Journal report.

The plan would reportedly involve the ECB swapping its Greek debt for bonds issued by the Eurozone's current bailout fund, the European Financial Stability Facility.

The EFSF, whose debt was downgraded by Standard & Poor's last month from AAA to AA+, would then redeem the bonds with Greece at less than par value – though the ECB, which itself paid less than par for the bonds, says it does not intend to take a loss.

The ECB Governing Council is due to deliver its latest policy decision tomorrow.

Here in London, the Bank of England, which also announces its latest monetary policy decisions tomorrow, is widely expected to press ahead with further quantitative easing despite recent positive economic data.

"On a risk/reward basis, I still think the Bank will do more QE," says Alan Clarke, UK economist at Scotiabank.

"The market's disappointment at the BoE not delivering would be too unwelcome. But if we continue to get reasonable growth numbers, then February's QE may be the last."

The Bank of England's Monetary Policy Committee voted to increase the size of its QE program from £200 billion to £275 billion last October.

"We believe the debate on the MPC will now be between [additional QE of] £25 billion and £50 billion this month, with our official call being for £50 billion," reckons George Buckley, chief UK economist at Deutsche Bank, who also feels "this may be the last round of asset buying" should economic data continue to be strong.

The world's second-largest gold bullion consumer China is set to see a 13% rise in the official annual minimum wage as part of a government jobs plan published Wednesday. The plan is part of China's 12th Five Year Plan, which runs from 2010 to 2015.

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 2012

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