London Gold Market Report

SPOT MARKET prices for buying gold bullion traded just below $1620 per ounce during Friday morning's London session, very slightly below where they ended last week, while stock markets also gained, amid renewed speculation over central bank stimulus measures.

Silver bullion traded around $28.30 per ounce, slightly up on where it started the week, while other commodities were also broadly flat.

The volume of gold bullion held by the world's biggest gold ETF, the SPDR Gold Trust (GLD), rose to a one-month high of 1263.6 tonnes Thursday, a day which saw gold continue its recovery from Wednesday's lows.

"Hopes that central banks will launch more bullion-friendly stimulus measures boosted the yellow metal [on Thursday]," says a note from Swiss refiner MKS.

On the currency markets, the Euro managed to hold its ground against the Dollar this morning after rallying above $1.23 yesterday, following comments from German chancellor Angela Merkel that appeared to endorse the position of European Central bank chief Mario Draghi.

Last month, Draghi said that the ECB would do "whatever it takes to preserve the Euro", comments that were followed immediately by rallies in stocks, precious metals and the single currency itself.

"What he said is something we repeated time and again since the beginning of the Greek difficulties more than two years ago," Merkel said yesterday, speaking during a visit to Canada.

"We feel committed to do everything we can to maintain the common currency. The European Central Bank, although it is of course independent, is completely in line with what we have said all along."

Reporters asked Merkel her thoughts on the possibility that the ECB might start buying government bonds again, as it did in the case of Spain and Italy last summer.

"[Recent ECB actions] have made it clear that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the Euro."

"It is becoming clear," says a note from Citigroup, "that the ECB purchases [of a country's sovereign bonds] have to be conditional on the implementation of austerity and structural reform measures in that country."

Spanish lender Bankia will soon begin receiving funds as part of an agreed €19 billion rescue, a spokeswoman for Spain's economy ministry said Thursday. Spain agreed a credit line of up to €100 billion in June to fund the restructuring of its banking sector.

The European Commission meantime will propose next month that the ECB meantime be given supervisory powers over all major European banks, German newspaper Handelsblatt reports, citing sources at the Commission.

By Friday lunchtime in London, the gold price in Euros looked set to end the week down around 0.8% following the Euro's gains against the Dollar.

"The market is still moving on changing expectations of central bank actions," says Nick Trevethan, senior commodity strategist at ANZ.

"[Gold in Dollars] is so far unwilling to push prices out of the $1590 to $1630 range."

Over in the US, the benefits of another round of quantitative easing from the Federal Reserve are "very dubious", Philadelphia Fed president Charles Plosser said this week.

"There are diminishing returns to these actions," Plosser said in an interview with the Wall Street Journal Wednesday.

"The evidence is not strong that somehow more [QE will] help the unemployment rate move faster to where we'd like it to be. I don't see that there is much benefit."

By contrast, Federal Reserve Bank of San Francisco president John Williams said last Friday the US economy is "at the point where it is definitely tilting toward [the Fed] taking further action".

The Philadelphia Fed is not due to become voting member of the Federal Open Market Committee, which decides US monetary policy, until 2014, with San Francisco becoming a voting member the following year.

Chinese premier Wen Jiabao meantime said Thursday that China has "the conditions and capabilities" to meet economic and social development targets this year, despite recent data suggesting China's economy is slowing down.

"We continue to think that more policy support will be announced soon," says Qinwei Wang, economist at London-based consultancy Capital Economics and a former employee of China's central bank.

"A further cut to the required reserve ratio, and...more infrastructure projects proposed by local governments will be given the go-ahead."

"For the time being, major central banks will let go of the mandate of price stability in favor of spurring growth figures," reckons Bayram Dincer, analyst at LGT Capital Management.

In South Africa meantime, more than 30 people have died after police opened fire on striking mineworkers at the Marikana platinum mine Thursday, which is operated by London-listed Lonmin.

Gold's premium over platinum prices, which hit an all-time high earlier this week, has narrowed after platinum rose by more than 3% since the start of Thursday's trading to hit $1450 per ounce by this morning.

Ben Traynor

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.

(c) BullionVault 2011

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