WHOLESALE MARKET gold prices dropped to their lowest level in 8-weeks, hitting $1641 an ounce shortly after US markets opened on Wednesday – 4.4% down on the week so far.
Stock markets gained while US Treasury bonds fell, following yesterday’s news that US Federal Reserve policy will remain unchanged this month.
The Dollar meantime added to recent gains, with the US Dollar Index – which measures the Dollar’s strength against a basket of major currencies – hitting its highest level in nearly 8 weeks on Wednesday.
Silver prices dropped to $32.77 per ounce as the US opened – just above last week’s low – while other industrial commodity prices also ticked lower.
As well as hitting their lowest level since January, gold prices also fell back through their 200-day moving average, which by PM London Fix prices was $1677 on Tuesday.
“Gold remains vulnerable to the downside,” says the latest technical analysis from bullion bank Scotia Mocatta.
The Federal Open Market Committee voted Tuesday by a majority of nine to one in favor of holding its main policy interest rate at 0.25%. Yesterday’s FOMC statement also noted that the Fed “expects moderate growth over coming quarters”.
“Knowing how dovish the Fed – especially [chairman Ben] Bernanke – is, for him to say we’re seeing growth is surprising,” says Ole Hansen, senior manager at Saxo Bank.
“Removal of [a potential increase in] quantitative easing and a higher rates forecast is not good for gold in the near term.”
The Fed also published the results of its annual bank stress tests yesterday, two days ahead of schedule. Based on the tests, the Fed says that 15 of the 19 banks tested would maintain their capital levels above the regulatory minimum of 5% of risk-weighted assets in an extreme scenario; specifically a rise in the unemployment rate to 13%, a 50% fall in stock prices and a 21% fall in house prices.
JPMorgan Chase, one of the 15 banks that passed the test, yesterday announced it is increasing the dividend it pays to stockholders by 20%. Shares in the bank gained 7% in US trading.
US stock markets rallied, with the S&P 500 hitting its highest level in four years, while the Dow hit levels not seen since late 2007.
“The froth is leaving gold to go into stocks,” one precious metals trader told newswire Reuters this morning.
“[Investors] see an opportunity there due to a slight improvement in the data. It’s not over yet, but overall sentiment seems to be turning.”
Britain’s chancellor George Osborne, who makes his latest Budget speech next Wednesday, is expected to ask the Debt Management Office to explore the possibility of offering 100-Year Gilts, which would potentially lock in prevailing low interest rates. Osborne is also expected to moot the possibility of so-called ‘perpetual gilts’, UK government bonds that have no maturity date.
Perpetuals were “first used in the wake of the 1720 South Sea Bubble crisis, to allow the government to borrow for as long as possible at record low rates”, newswire Bloomberg reports.
The longest-dated bond issued by the DMO during financial year 2011-12 was a 50-Year index-linked gilt. Britain tried issuing perpertuals to deal with its debt following the Second World War, though FT Alphaville reports that the so-called Dalton Bonds, named after the chancellor at the time, “flopped”.
“The political winds in countries with central banks are a long way from blowing in the direction of fiscal rectitude,” says today’s commentary from Societe Generale strategist Dylan Grice.
Grice contrasts countries like the UK and US with those like Ireland, which gave up its monetary sovereignty to join the Euro and which, he argues, has experienced a sufficiently severe crisis for people to accept the need for “draconian fiscal policies”.
Grice, who last year made a case for gold at $10,000 an ounce, goes on to argue that the time to sell gold will be when “majority opinion [accepts] the painful contractionary medicine”.
Elsewhere in Europe, Greece’s €130 billion second bailout was formally approved today.
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.
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