Gold prices at pivot point while awaiting EU meeting

In the Lead: “This Time is Different. Yeah, Right.”

Gold prices once again broke below moving averages as sellers emerged in the wake of a fresh party spoiler by rating agency S&P. With just hours to go prior to the pivotal EU meeting the by now (in the minds of some) notorious firm issued a blanket warning on any and all eurozone debt. Critics have labeled S&P’s “well-timed” warning issuance as a deliberate attempt to meddle in the region’s politics and they see it as aggravating an already quite bad situation.

In fact, one member of the ECB’s Governing Council, Ewald Nowotny (Austria) flat-out declared that “rating agencies are assuming a political role” with these kinds of steps. The S&P alarm bell managed to pull the rug out from underneath the euro overnight and it gave rise to a fresh set of gains in the US dollar while sinking commodities pretty much across the board. The euro broke to under the $1.34 mark, French and even German bonds took one on the chin, and bellwether copper sank 1.74% this morning. Merci, S&P.

Gold spot fell to just under $1,705 per ounce in early dealings while silver lost about half a dollar and slipped to just above the $31.50 per ounce bid level. Gold continues to be impacted by the funding squeeze in Europe and thus finds itself $100 away from a level it must break above ($1,803) in order to have a chance at revisiting previous highs or trying to set new ones.

As for today, traders are now digesting the news that not only is S&P considering slashing into the ratings alphabet soup of 15 eurozone nations, but that it is also contemplating lowering the AAA rating previously assigned to the European bailout fund (!). The confrontations with S&P are possibly about to turn ugly as some have suggested that the agency’s warning issued on Monday was in retaliation to the European Commission having announced plans to turn the regulatory screws up a notch on rating agencies last month.

Team “Merkozy” has basically agreed upon the need for a new Eurozone treaty. However, this new version is thought to be a tough one; complete with automatic sanctions for member nations that spend more than they can afford to, and with no more ‘haircuts’ for bondholders. Ms. Merkel’s two ‘sacred cows’ also featured in the to-be-yet-adopted treaty: i.e., the ECB will not become a lender of last resort and eurobonds will not see the light of day. At any rate, this week’s summit might indeed be an apex of sorts for the crisis that has completely dominated the year’s markets and headlines. You can hear the fiat currency/hyperinflation doomsday writers scrambling for new scary material right about now…

The time has once again come for another bit of myth-busting. Surely, you have by now read a plethora of articles by such newsletters as the aforementioned ones as to the likelihood of China gobbling up massive gold tonnage, demanding US gold, and/or turning sour on the US dollar and unceremoniously dumping it from its huge reserves. Well, not so fast, says erudite research house CPM Group New York. In the firm’s latest market commentary the following debunking of such wacky ideas is presented as follows:

“Some gold market commentators, in China as well as in the United States and Europe, have suggested that the Chinese government might someday demand the gold in exchange for some of its holdings of U.S. debt, but this runs into two problems: First, again, the small size of the value of U.S. gold holdings compared to the volumes of its debt held by the Chinese government. More importantly, however: There is no clause, agreement, or legal statute that says the U.S. government is or could be compelled to hand over its gold in exchange for Treasury bonds. That link was severed in August 1971. Interestingly, the Chinese government is fully aware of both the folly and futility of such thinking. The head of the Chinese Investment Corporation, the Chinese sovereign wealth fund created in late 2007, in December 2011 stated the official wisdom, which is that the Chinese government would be interested in finding a way to use some of its U.S. dollar holdings to invest in infrastructure projects within the United States, to help rebuild the U.S. economic capacity and provide jobs in the United States.” Ironic? Not when you consider the vested interest at stake. Keep those large grains of pink Himalayan salt handy for when you run across the next “China to Dump US dollars/debt/etc” newsletter…

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