Gold trading alongside euro with little physical interest

In the Lead

Metals markets opened the midweek session on the downside as the euro’s “Draghi Rally” fizzled out and the US dollar recovered to near 82.50 on the trade-weighted index. The common currency had rallied (and gold along with it) on the back of rising optimism that EU officials might take certain easing or interventionist measures to shore up flagging economies and runaway bond yields. Forex traders expect the euro to trade between $1.22 and $1.24 for the time being, barring any surprises on the statistical or regional political front. S&P lowered its rating outlook on Greece to “negative” from “stable” in the latest round of cuts. Greece already has a CCC rating, which is eight levels below investment grade (read: junk).

However, a decline of nearly three-quarter percent ensued this morning in the wake of reports that German industrial production fell 0.9% in June, industrial orders declined 1.7%, and that exports slid 1.5% on the month. Both figures were below economists’ projections. Italy’s economy once again contracted in the second quarter with its GDP falling 0.7%. The country has now experienced four consecutive quarters of economic decline and is firmly in the grip of a deep recession. The situation has prompted Capital Economics analyst Ben May to caution that “Italy faces huge economic and fiscal problems. Although the pressure from the markets has recently eased, we still think that it is only a matter of time before Italy is forced to seek a sovereign bailout.”

Market watchers are becoming increasingly convinced that after half a year on the job, Mr. Draghi might be a man who can talk the talk, but stumbles badly when it comes to the bit where he has to attempt the walk. The evidence is starting to mount up that when it comes to reassuring the market, Mr. Draghi has about as much credibility as Greek bond salesmen.”

Spot gold prices drew closer to the $1,600 psychological support level, falling for the first time in four days, with an initial decline of nearly $10 and a bid-side quote at $1,602.50 per ounce. VTB Capital analyst Andrey Kryuchenkov writes that “Bullion continues to trade with the single currency with little physical interest. So far, gold has failed to attract any safe-haven inflows, instead trading as any other risk asset and in line with the broader market sentiment.” Speaking of physical interest (or the lack thereof), projections made by the Bombay Bullion Association place the level of Indian year-to-date (to September) gold imports at 450 tonnes as compared to the 753 tonnes imported in the same period last year.

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