SocGen Advises 'Holding Gold Tight' as ECB, China Cut Rates, UK Adds Another 50bn of QE

By: Adrian Ash | Thu, Jul 5, 2012
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Wholesale dollar prices to buy gold eased 0.5% from a new 2-week high at $1624 per ounce Thursday lunchtime in London, as the Euro currency fell hard following a widely expected cut to European Central Bank interest rates.

The ECB cut its key lending rate to a new record low of 0.75%, and also cut the interest rate paid to commercial banks holding cash on deposit at the central bank to zero.

European stock markets rose and commodity prices jumped on the news, pushing Brent crude oil back above $100 per barrel.

Silver prices retreated 1.2% after hitting this week's high at $28.45 per ounce.

The People's Bank of China also cut its rates today, unexpectedly taking its deposit and lending rates down to 6% and 3% respectively.

Consumer price inflation in China - now the world's #1 gold consumer - slowed to a 2-year low of 3.0% in May on the official measure.

"Hold tight to gold ahead of QE3 [in the US]," says today's Global Daily Spotlight for clients of investment and bullion bank Société Générale, advising a "Strong Overweight" position in precious metals.

"Our fundamental gold view is unchanged, and we still see upside for the metal," agrees the latest Commodities Daily from Standard Bank in London.

"We would see any potential sell-off in gold after [today's European rate] announcement as a short-term opportunity" to buy gold, the bank's analysts said this morning.

Because "ultimately a rate cut implies a lower real interest rate. That would be bullish for gold."

UK investors and savers wanting to buy gold meantime saw the wholesale price rise through £1040 per ounce this morning for the first time since mid-June, after the Bank of England held its key lending at a record-low of 0.50% for the 40th month running but extending its Quantitative Easing by another £50 billion.

The Bank has already bought £325 billion of UK gilts under its QE program - equal to £1 in every £4 of government debt in issue.

"Without additional monetary stimulus, it [would be] more likely than not that inflation would undershoot the target [of 2.0% per year] in the medium term," said the Bank of England's statement today, citing "the increased drag from the heightened tensions within the Euro area."

Spain this morning sold €3.0 billion in new bonds, paying 6.43% per annum to raise 10-year debt - sharply higher from the last auction's 6.04%.

German factory orders fell 5.4% in May from the same month last year, new figures showed on Thursday.

"Above all, [there must be] no pure Keynesian stimulus in the Eurozone!" says Patrick Artus at French investment and bullion bank Natixis.

"Stimulating demand in the Eurozone's troubled countries will first and foremost lead to an increase in their imports and their external deficits. [Any] stimulus programme should focus on investments generating long-term growth and exportable production capacity."

Eurozone investors and savers wanting to buy gold today saw the price rise 0.9% to a 1-month high of €41,750 per kilo - just shy of the €1300 per ounce level first breached in the "perfect storm" of summer 2011.

Meantime in India - formerly the world's #1 source of demand to buy gold, but now overtaken by China - "The weak monsoon will most likely hamper gold demand in rural India," says Bombay Bullion Association president Prithviraj Kothari, speaking today to the Economic Times.

Demand to buy gold from rural areas accounts for some 60% to annual consumption, says the paper.

"Also, investors are putting their money in fixed deposits that give them more than 9% returns," says Kothari.

"Today demand is negligible," says a Mumbai gold dealer quoted by Reuters, blaming a drop in the Rupee's foreign exchange rate which pushed prices higher.

Households "are waiting for a correction" before they buy gold he says, citing 29,000 Rupees per 10 grams - some 3% below Thursday's prices - as a key level for "a pickup in demand."

Vietnam effectively nationalized its domestic gold bar industry meantime, with the central bank now the sole producer of investment bars.

The State Bank of Vietnam also named Saigon Jewelry Co. - which it "administratively acquired" in 2001 - as the official brand for gold bars.

"The move was intended to save expenses for the government and society, as well as avoid messing up the gold market," says SBV deputy governor Le Minh Gung.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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