Gold trades higher as dollar slips

In the Lead: “You Want Frites With That?”

Precious metals started the midweek trading session under continued but mild selling pressure despite a softer U.S. dollar and a third Moody’s downgrade of Spain late yesterday. France, on the other hand, pledged to defend its AAA rating after Moody’s warned it might yank one of the letters in question or at least place the country on ‘negative’ watch. That said, the French government did allow for the fact that its 2012 growth projections had been a tad…”too high” and that its borrowing costs have escalated of late.

France’s Socialist Party candidate for the 2012 election, Francois Hollande, laid out pivotal issues for the nation’s electorate when he recently correctly identified the reduction of the budget deficit as priority number one. Mr. Hollande aims for France to have a balanced budget by 2017 as opposed to Mr. Sarkozy’s vision of a deficit that might stand at 3% of GDP by 2013. For the Socialist (!) plan to call for a dramatic cap on government spending might seem like some kind of “Twilight Zone” hallucination for some, but, hey, the times they are a’changin’…as they say. Some tough choices are in the making for France’s denizens. Join the global club, Nos Amis. Hold the frites and the mayo.

The uncertainties surrounding the details of how the European debt crisis might be resolved did not dissipate in the wake of the putative agreement between France and Germany to expand the EFSF to 2 trillion euros in size. In fact a German Finance Ministry representative said this morning that there has been no specific decision made on the scope of the rescue fund as yet. At any rate, the common currency received a modicum of a lift this morning and climbed back to the $1.38 mark as speculators deemed that an ESFS ‘adjustment’ is only a matter of time.

Ask the average fund manager out there what the odds of a Greek default might be, and you will tally 70% of them counting on a 100% chance that such an event before the first quarter of 2012 draws to a close. While the collective wisdom of investors is a metric that has often been proven wrong, those odds are quite impressive at this time. Still, if there is any good news in all of this, it would be the fact that, according to market participants, the probability of an ‘orderly’ default by Greece has already been priced into various markets.

European banks are promising asset sales, cost cuts and lending reductions to the tune of $1 trillion in an effort to reassure investors that they can navigate through the financial tough spot the Old World finds itself in at the moment. Possible recapitalization of certain banks has been on the EU’s talking table as a possibility. However, the proposed self-shrinkage plans are meeting with skepticism by financial analysts. Some of them doubt that the €200 or €300 billion worth of additional needed capital can be raised by asset sales by the banks. A sale, by definition, has to also have a buyer in order to materialize. Otherwise, it remains an offer. Would-be buyers of said assets are, at the moment, less than visible.

The CFTC voted 3-2 to approve new limits on commodity speculation. In essence, the new rules of the speculative game involve a limit of no more than 25% of deliverable supply in a commodity for the nearest delivery month. Other caps limit players to 10% of the first 25K contracts of open interest and to 2.5% thereafter. RBC analysts have surmised that with the advent of these rules it will now become perhaps more important to keep an eye on open interest figures than parsing the technical charts.

Spot gold drifted $4 lower on the open, and was quoted at $1,651 the ounce as against a 0.38 slip by the greenback on the trade-weighted index (to 76.78). Silver was off 12 cents at the same time, with a spot-bid quote coming in at $31.92 the ounce. Not much there to report in terms of sizeable moves in platinum and palladium; they both eased by about $3 per ounce to start off near $1,527 and $617 respectively. These all appeared like markets in need of fresh news to drive them.

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