London Gold Market Report

U.S. DOLLAR gold bullion prices fell slightly in Wednesday morning's London trading, but held above the $1600 per ounce level it rallied above yesterday after Federal Reserve chairman Ben Bernanke  told Congress that that Fed's ongoing quantitative easing policy "is providing important support to the recovery" and that the benefits "are clear".

Stock markets also posted gains this morning, making up some ground lost yesterday, while commodities were broadly flat and longer-dated US Treasuries gained.

Like gold, silver eased lower this morning but held above $29 an ounce by lunchtime in London.

In his testimony to the Senate Committee on Banking, Housing and Urban Affairs, Bernanke added "inflation expectations appear well anchored" and that the Fed does not expect to see "the development of significant inflation pressures".

Bernanke also reiterated the importance of keeping the federal funds rate close to zero.

"Keeping long-term interest rates low has helped spark a recovery in the housing market and has led to increased sales and production of automobiles and other durable goods," he said.

On the New York Comex the number of gold put options, which rise in value as gold falls below a given strike price, rose to a record following the publication of the latest Fed policy meeting minutes last week, according to news agency Bloomberg.

Following Bernanke's testimony yesterday however "the market is a little less concerned about a premature exit of quantitative easing, which would be bad for gold," says Nick Trevethan, senior commodity strategist at ANZ.

"Don't forget that the Fed's focus is on jobs and inflation. The job market has stabilized, but we are not seeing efficient job growth to make the exit of QE look imminent. There is still a long way to go."

Britain's economy meantime grew by 0.3% in 2012, according to the second estimate of fourth quarter gross domestic product published by the Office for National Statistics Wednesday, which revised last year's growth estimate up from zero. The Q4 contraction of 0.3% reported in the first estimate however remains unchanged, while government spending rose 0.6% over the quarter and 2.6% over the year as a whole.

"Government spending can't be sustained at that level," says Deutsche Bank economist George Buckley, "so an important part of economic growth is actually going to be taken away and the risk is that exports remain negative and that consumption weakens because of higher inflation."

The Bank of England's Monetary Policy Committee has discussed the possibility of setting negative interest rates, MPC member and BoE deputy governor Paul Tucker told the Treasury Committee yesterday.

Holdings of bullion held to back gold exchange traded funds meantime are on course for their biggest calendar month drop since April 2008, according to data tracked by Bloomberg.

"The [gold] market has lost increasing support this year in line with other perceived 'safe havens' such as the Japanese Yen, Swiss Franc and US Treasuries," says a note from Deutsche Bank this morning.

"We expect gold returns will eventually recover although this will most likely require a moderation in growth expectations and with it a correction in global equity and interest rate markets."

"The fundamental background for gold remains reasonably supportive," adds a note from Credit Suisse.

"It is rather that potential gold investors consider other classes more attractive...investors have the tendency to buy less of the precious metal in an environment where growth is stabilizing."

Gold bullion imports worth $2.7 billion contributed to Thailand's record trade deficit last month, the country's Commerce Ministry revealed Wednesday. Over the whole of 2012 demand for gold from Thailand was worth $4.3 billion, according to latest World Gold Council figures.

The volume of gold imported by Thailand rose 133% year-on-year, Ministry figures show, although its report did not include figures for gold exports.

Last week India, the world's biggest source of private gold demand, banned imports of gold jewelry from Thailand unless the authorities can be satisfied that the work in making the jewelry had added at least 20% to its value over and above that of the bullion content.

India last month raised its import duty on gold to 6%, although a trade agreement with Thailand meant that gold imported from there was only subject to a duty of 1%.

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