Posts
Gold's uptrend resumed after a brief pullback a driven by a number of supportive factors. The benchmark contract surged to as high as 1410.4 before settling at 1403.2, up +0.39%. Today in Asia, buying interests remained robust and price was sent to a new record of 1413.3. Robert Zoellick, president of the World Bank, suggested major economies to use a modified gold to stabilize currency markets and the financial system. While the idea will unlikely be put into practice, it put gold under the spotlight. Currency tensions were again the focus ahead of the G-20 summit on November 11/12. Loss of confidence in fiat currencies spurs demand of gold. While pressures on the euro from renewed sovereign crisis in peripheral European economies have also weighed on gold (given the traditional positive correlation between euro and gold), past experience (May/June 2010) told us that intensified worries on sovereign woes would lead to surge in gold price. After initially declined to 85.96, the front-month contract for WTI crude oil rebounded strongly and finished the day at 87.06, up +0.24%. Libya's oil minister said that there's no need for the OPEC to increase output, easing worries about excessive supply.
World Bank president Robert Zoellick wrote in the Financial Times that G20 economies should work on a cooperative monetary system that should 'consider employing gold as a reference point of market expectations about inflation, deflation and future currency values'. Indeed, what Zoellick suggested was a modified version of Bretton Woods gold standard under which the value of the USD was fixed in terms of gold, and other countries held their currencies at fixed exchange rates against USD. When trade deficits occurred, the deficit country financed the deficit with its reserves of international currencies. We do not expect his suggestions will be put into practice. Indeed, the US would not like to see the dollar's status as a reserve currency been replaced. Zoellick's suggestions did help send gold higher. He also pointed out that while many textbooks may treat gold as 'old money', the financial markets are currently using it as an alternative monetary asset. This justified gold's recent rally.
The G20 summit will be held on November 11/12 in South Korea. While the purpose of the meeting is to resolve currency and trade tensions between economies, it helps remind us of intensified disagreements between countries, especially between advanced and emerging markets. The Fed's decision to inject more money to the US financial system has triggered criticism from all over the world. Officials in Germany, China and Brazil all described the move as irresponsible. German Finance Minister Wolfgang Schaeuble said the $600B asset-buying plan is “clueless'. Brazil's central bank president, Henrique Meirelles, said 'excess liquidity' in the US is creating 'risks for everyone'. While Cui Tiankai, china's Vice Foreign Minister said 'many countries are worried about the impact of the policy on their economies'. These criticisms should have no impact on Fed's future monetary policy and it would likely employ more easing measures should the present ones fail to revive the recovery.
Conflicts between economies reflect that it's unlikely for major economic powers to reach a common agreement on currency tensions. This gives gold another boost as investors lose confidence in fiat currencies.
In the currency market, euro's weakness was the most significant as concerns about sovereign crisis in peripheral European economies heightened as indicated in widening in yield spreads. While sentiment in Greece improved mildly after the current government won in the regional election, yields in Irish and Portuguese bonds soared to new highs. In May/June 2010, investors fled to gold for safe haven amid concerns that sovereign crisis in peripheral European economies would hurt the euro and even disintegrate the currency. While we do not believe the problem this time will be as serious as the one occurred half a year ago, the distress may continue boosting gold in the near-term.
Latest Analysis from this Author
World Markets Tumble as G20 Fails to Resolve Tensi... (Friday, 12 November 2010 06:49 ET)Gold Daily Technical Outlook (Friday, 12 November 2010 06:09 ET)Silver Daily Technical Outlook (Friday, 12 November 2010 06:08 ET)Crude Oil Daily Technical Outlook (Friday, 12 November 2010 06:08 ET)Natural Gas Daily Technical Outlook (Friday, 12 November 2010 06:07 ET)Risk Appetite Damps amid Bailout Concerns in Europ... (Friday, 12 November 2010 00:42 ET)Economic Calendar 11/12/10 (Thursday, 11 November 2010 11:58 ET)Rally in Oil Prices Resumes as Inventories Drew. U... (Wednesday, 10 November 2010 23:54 ET)Economic Calendar 11/11/10 (Wednesday, 10 November 2010 13:23 ET)Crude Rebounded as Oil Inventories Tumble (Wednesday, 10 November 2010 12:08 ET)
No comments:
Post a Comment