London Gold Market Report

THE SPOT PRICE to buy gold traded in a tight range around $1520 an ounce Friday morning London time – 0.5% above its one-month low – having fallen in Asian trading, while stocks gained after comments from China's premier that inflation in that country is under control.

Spot oil prices dipped Thursday after the International Energy Agency said it will release 60 million barrels of oil from strategic reserves.

Going into the weekend, the Dollar gold price was headed for a 1.3% loss for the week Friday lunchtime. 

The Sterling price to buy gold, meantime, slid to £947 per ounce Friday morning – slightly below last week's close – following a hectic day Thursday which saw it plunge 1.8% from its record high.

The silver price slid to $34.68 – a 3.3% drop on the week.

"We are bullish on gold while the metal holds above $1504," says technical analysts at bullion bank Scotia Mocatta. 

If the price to buy gold falls below $1500, however, it could slip as far as $1463 they warn.

"Our long term view on gold remains unchanged," says Walter de Wet, commodities strategist at Standard Bank.

"We believe gold will continue to push higher in 2011."

China's manufacturing sector has barely grown in June, according to HSBC's purchasing managers' index, prompting fears that China – the world's second largest gold bullion market – is heading for an economic "hard landing".

HSBC's PMI – which is published roughly a week ahead of the official PMI – fell to 50.1 for June, down from 52 in May. A figure of 50 or above shows growth, while below 50 shows contraction.

"Demand is cooling due to the effects of tightening measures and slackness in external markets," said Qu Hongbin, HSBC's chief economist for China.

"The good news is that inflationary pressures started to ease meaningfully in June," following May's rise in consumer price inflation to 5.5%.

"China has made capping price rises the priority of macroeconomic regulation," writes China's premier Wen Jiabao in Friday's Financial Times.

"The overall price level is within a controllable range and is expected to drop steadily. The output of grain, of which there is now an abundant supply, has increased for seven years in a row."

"Inflation may peak in June or July," agrees Hua Zhongwei, Beijing-based analyst at Huachuang Securities. 

"But there are many underlying factors that could push up prices such as labor cost and agricultural product inflation." 

China's largest farming company, Heilongjiang Beidahuang, last week signed a joint venture with Cresud of Argentina to farm soybeans. The company also plans to spend $1.5 billion leasing farms in Argentina's Rio Negro province, on which it will grow a range of crops, including wheat and corn.

China also expects to import a record 2 million tons of corn from the US this year, according to Ding Shengjun, senior researcher at China's Academy of State Administration of Grain.

"Importing the corn from the US is a practical way to stabilize the domestic price," says Ding.

Chinese demand to buy gold, meantime, will continue rise as a result of ongoing inflation fears, according to Zhang Bingnan, secretary general of the China Gold Association.

"Enthusiasm for gold as an investment will get stronger," says Zhang, adding that gold investment demand "will keep doubling in the next two years." 

Here in Europe, the EU announced Friday that it has agreed a deal to provide fresh financial aid to Greece – subject to the Greek parliament passing €78 billion worth of austerity measures.

"This is an important decision that says once again we will do everything to stabilize the Euro overall," said German chancellor Angela Merkel.

The deal will involve "a voluntary rollover of bonds so that it will not create a credit event," said Olli Rehn, European commissioner for economic affairs.

"Foreign banks will struggle to justify rolling existing holdings unless the rate at which they can do so is economically viable," warns Mark Schofield, global head of interest rate strategy at Citi.

Rates that are "potentially attractive to investors, are not sustainable for Greece and would, if locked in, lead very quickly to insolvency".

Ben Traynor

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