Gold Prices await Potential Trigger – Spain, Greece & Italy Markets crash.

Category: Eurozone | Gold Trading | Nifty
July 23, 2012 | Comments Off |
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Gold Prices

Gold Prices await Potential Trigger

Downside triggers for Gold Prices:

Gold ETFs (exchange-traded funds) are seeing outflows this month & this can be a cause of worry for the Gold Prices struggling towards an upside rise. As a whole, holdings in the largest Gold ETF, the GLD, are down 393,000 ounces in July, versus a build of 1.2 million ounces in June. Investor interest in exchange-traded products backed by Gold has been “remarkably resilient,” but there is potential for this to become a source of supply if investors start selling. Annual Gold ETP demand has slowed in recent years, but is positive for 2012 so far at 36 metric tons.

Bernanke’s congressional testimony last week sent Gold Prices and other hedges against U.S. dollar debasement into negative territory. Exchange-traded funds backed by physical Gold, such as SPDR Gold Trust ETF (GLD) and iShares COMEX Gold Trust (IAU), reported negative returns.

Potential upside catalysts for Gold Prices:

Rising global prices for corn and soybeans amid tensions in the Mideast, have not been factored into Gold Prices. Rising Food Prices are relevant for Gold Prices to the extent that it feeds into CPI (consumer price index) prints, particularly in countries that have an affiliation with Gold.

Growing geopolitical tensions in the Middle East of late have been generally ignored by the Gold market. These issues could potentially drive Gold Prices up when factored in. The Euro-zone crisis is at the center of all attention currently. Historically, Gold is a popular safety play during times of financial doubt. A breakup in Europe will cause Gold Prices to spike.

Sentiment towards the Euro has taken a further leg lower over concerns in Spain and Greece; both countries equity markets are now over 4% lower, while Spanish yields continue to market new highs. There are news reports that six Spanish regions may ask for additional aid.Valencia and Murcia have already sought a bailout. Meanwhile, the country’s recession deepened as the Euro-zone’s fourth-largest economy shrank 0.4% in the most recent quarter. Markets are also worried about the health of the nation’s banks.

Spain, Italy Ban Short Selling - Greece Back in the Eye of the Storm

Spain and Italy reinstated a short selling ban on stocks as bank shares plunged to record lows, bond yields rose and the euro traded below its lifetime average against the dollar on concern the debt crisis is growing. Italy’s Consob prohibited the practice on 29 banking and insurance shares for one week & Spain’s CNMV market regulator banned the creation of negative bets using all equity securities through shares, derivatives and over-the-counter instruments for three months. Today’s move echoes decisions in August last year by the two nations plus France and Belgium after European banks hit their lowest levels since the credit crisis of 2008 and 2009. Most bank stocks extended their decline once the bans were lifted.

The IBEX 35 Index dropped 2.6% to 6,087.20 at 3:15 p.m. in Madrid, after earlier falling as much as 5.5%.Italy’s FTSE MIB declined 3.9% to 12,554.16. The Euro Stoxx Banks Index (SX7E) declined as much as 6.4% to a record low today.

Wall Street tracked a sharp sell-off in global equity markets on Monday as Spain appeared closer to needing a bailout and fears grew that Greece may be approaching an exit from the Euro-zone.

The Spanish region of Murcia looked set to follow Valencia in tapping a government program to keep its finances afloat, while local media reported half a dozen regions were ready to do likewise.

German magazine Der Spiegel cited high-ranking representatives in Brussels saying the IMF may not take part in any additional financing for Greece. Inspectors from the European Commission, European Central Bank and International Monetary Fund arrive inAthenson Tuesday. The Dow Jones industrial average DJI dropped 211.42 points, or 1.65%, to 12,611.15 by now. The Standard & Poor’s 500 Index .SPX fell 20.92 points, or 1.54%, to 1,341.74 at the time of writing.

Traders were also focused on a slowdown in the global economy. China’s economic outlook was cut by Japan, its biggest Asian trading partner, Bloomberg reported. Spain’s IBEX stock index fell 2.4%, hitting its lowest level in nearly a decade. Italy’s FTSE MIB .FTMIB fell nearly 4% and hit its lowest level in more than 3 years.

Spain’s economy sank deeper into recession in the second quarter, its central bank said on Monday, as investors spooked by an undeclared funding crisis in its regions pushed the country ever closer to a full bailout.

Economic output shrank by 0.4% in the three months from April to June having slumped by 0.3% in the first quarter, the Bank of Spain said in its monthly report. Economy Minister Luis de Guindos ruled out a full-scale financial rescue on top of the 100 billion euros already earmarked for the country’s banks, but Spain’s sovereign bond yields stayed mired in the danger zone.

In contrast to de Guindos, who told lawmakers there was little else Spain could do to ease the tensions after it approved a 65-billion-euro austerity package last week, the central bank’s deputy governor said more belt-tightening was needed.

“(Current market problems) reflect problems inSpainas well as the euro zone,” Fernando Restoy said after a conference inMadridwhen asked about market stress. ”We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union.” Earlier, media reports suggested half a dozen regional authorities were ready to follow in the footsteps ofValenciain seeking financial support fromMadrid.

Prohibitively high refinancing costs have virtually shut all of the 17 regional governments out of international debt markets, forcing the worst hit to seek loans from the central government to meet bond redemption’s. Spain’s sovereign debt yields rose above 7.5% on 10-year paper on Monday, well above the 7% level that triggered the spiral in borrowing costs that led to bailouts for other Euro-zone states.

In a sign of a growing awareness among the euro zone’s heavy hitters of the need to shore up Spain, Economy Minister De Guindos will travel to Berlin on Tuesday to meet with his German counterpart Wolfgang Schaeuble.

“We believe that the reforms already begun by Spain will help calm the markets,” Schaeuble’s spokeswoman Marianne Kothe said in Berlin, adding that the regions’ funding problems had “nothing to do with” the European rescue deal for the country’s banks.

Germany knew of no plans for a broader Spanish bailout request, she said. Asked about that option on the sidelines of a parliamentary hearing on the bank aid, De Guindos said: “Absolutely not.”  The mounting unease was reflected in financial markets.

Spanish two-year bond yields were up almost 90 basis points at 6.64%, the cost of insuring Spanish debt against default rose to a record high, and the blue-chip stock market index Ibex hit its lowest level since 2003.

Spain slipped into recession for the second time since 2009 in the first quarter of this year, its economy crippled by a bank sector weighed down by soured assets from a collapsed property bubble and unemployment rates that have risen close to 25%.

The government said on Friday it expected the economy to continue to shrink well into next year, fuelling market and massive protests. For the 12th day running, government employees demonstrated against the cuts program in the main cities of the country on Monday, blocking roads and stopping traffic.

TIME FOR THE ECB TO TAKE SOME ACTION:

In his comments to parliament, de Guindos hinted the European Central Bank – hitherto unwilling to relaunch stalled stimulus programs that might offer relief toSpainand other states at the sharp end of the euro zone debt crisis – should now step in.

Asked whether ECB intervention was needed, De Guindos said: “I repeat that in this situation of uncertainty and excessive volatility… the only way to act goes well beyond the capacity of governments.”- Reuters reported.

Meanwhile, Spain’s central bank said an accelerated program of structural reforms could offset the impact of the deep austerity program, aimed at shrinking one of the highest public deficits in the euro zone.

It called for great sector liberalization to improve competitiveness, the reduction of administrative red tape and the improvement of transparency in goods and services markets. “This should offset the negative short-term effect of the higher fiscal restrictions and, above all, will determine the economy’s medium- and long-term growth potential and productivity,” the bank said in its monthly bulletin.

India Equity Markets Update:

The Sensex slumped by 281 points to close at nearly one-month low as debt problems in Spain again came to the fore, sparking off a fresh wave of risk-aversion across global markets. After opening lower on weak Asian cues, the BSE benchmark index closed with a loss of 281.09 points, or 1.64%, to end below the 17,000 mark as all sectoral indices, led by metals and realty, suffered losses. Across the market, nearly 1,800 stocks ended lower while 990 gained. In the 30-share Sensex, 28 stocks, led by Maruti Suzuki and Sterlite that lost over 5% each, closed lower as across-the-board selling was seen.


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