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Could Shifting Opinion to a Growth Pact in Europe Favour Gold?

Gold futures dropped four days in a roll by about 1.8% and ended at $1,634.80 on Thursday. The last time gold futures fell consecutively for four days was during 12th to 15th of December last year when dollar surged and the fear for European banking problems caused investors to rush for liquidity, selling gold. The broader market is also on a downdraft this week with the S&P down 0.8%, Stoxx down 2.4%, Euro down 0.8% and CRB commodities index down 1.3%. Dollar was up 0.6% week to Thursday.

Holdings of gold-backed ETPs now stand at 2,381 metric tons, the lowest level since 1st February, according to Bloomberg. In April India physical gold imports fell to 30 to 35 tons from 90 tons a year ago, said the Bombay Bullion Association, due to higher prices and strikes against rising import tax.

As European unemployment rose to 10.9%, the EC PMI dropped to 45.9 and the U.S. added fewer jobs, dollar rose while investors dumped commodities and went for safe havens such as U.S dollar and Treasury instead of gold.

Dollar was further boosted on Thursday when the European Central Bank (ECB) left interest rate at 1 percent without announcing any further bond purchase program. Governor Draghi is actually more concerned about downside economic risk than inflation risk and wants to put growth back as a priority. This coincides with more and more Europeans turning to growth rather than fiscal austerity, such as the French candidate, Hollande, the Greek, the Spanish and the Italian governments who sorted to loosen the tight fiscal stance. U.S. economist Paul Krugman leads the pack in saying that budget cut without growth does not help to correct economic imbalances which in Europe’s case are caused by too much private debt. He therefore urges the ECB to cut interest rates further and to buy government bonds. When that happens, gold price should push higher.

In a recent interview, economist Marc Faber reiterated he does not see any gold bubble because gold is not widely-owned and the economic and debt situation has grown much worse, favouring higher gold prices. He also reckoned that with the growth outlook weakening the major central banks would print more money ultimately.

Investors will wait and see whether this Sunday’s France second round of presidential election and Greece general election will be game-changing.

Austin Kiddle
Sharps Pixley, London

04 May 2012 | Categories: Gold

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