Dollar Strength “Temporarily Stalls Gold”, But “Gains Ahead” with “Conditions Still Favorable”

Spot market prices for buying gold eased to just above $1770 an ounce during Tuesday morning London trading, around ten Dollars below where they started the week, while stocks and commodities were broadly flat despite major economies seeing their growth forecasts downgraded by the International Monetary Fund.

Prices to buy silver dropped below $34 an ounce – down more than 2% on the week so far.

US Treasury bond prices gained this morning, in contrast with those for UK and German government debt, which fell along with the Euro.

A day earlier, the volume of gold held to back SPDR Gold Shares (GLD), the world’s biggest gold ETF, hit a new all-time high at 1340.5 tonnes.

“Though the market conditions are still favorable for gold, liquidation of long positions may push the metal lower,” says the latest note from refiner Heraeus.

“The demand for investment bars continues to be steady,” it adds.

Last Tuesday saw the net long position of bullish minus bearish Gold Futures and options contracts on the Comex hit its highest level since August 2011, weekly data published by the regulator show.

On the currency markets this morning, the Euro fell almost 1¢ against the Dollar, the fall coinciding with an appearance by the European Central Bank president at the European Parliament.

“The return of Dollar strength has stalled the move in gold,” says Deutsche Bank analyst Michael Lewis.

“But it’s very temporary; we’re still on track to see more gains.”

Eurozone economies will contract more than previously expected, while a number of European governments are set to miss deficit targets next year, according to the latest World Economic Outlook from the IMF, published Monday.

The Eurozone as a whole will shrink by 0.4% in 2012 – down from 0.3% forecast in July – and will grow by only 0.2% in 2013, compared to 0.7% projected three months ago.

Germany and France, the two largest Euro area economies, are expected to see slower growth than previously forecast this year and next.  Italy and Spain, the third and fourth largest Eurozone economies respectively, will contract more sharply this year and next than previously projected, the IMF said.

“There is no chance that Spain will hit its targets,” says Megan Greene, director of European economics at research firm Roubini Global Economics.

“The deficit targets are economic suicide.”

Spain’s deficit target for 2012 is 6.3% of GDP and 4.5% for next year. The IMF says it expects the actual deficit to be 7% of GDP this year and 5.7% next.

“Attention should be paid to meeting structural fiscal targets, rather than nominal targets that will likely be affected by economic conditions,” the IMF report said.

In addition, “the ECB should keep its policy rate low for the foreseeable future or reduce it even further,” it said.

“The ECB should also continue to provide ample liquidity to banks.”

The ECB “stands ready” to buy distressed sovereign bonds under its Outright Monetary Transactions program, ECB chief Mario Draghi told the European Parliament Tuesday.

But the central bank “cannot undertake monetary financing and cannot replace what other member states should do,” Draghi added.

“It’s too easy to think that the ECB can replace governments’ action or lack of it [by] printing money. That’s not going to happen.”

Elsewhere in Europe, German chancellor Angela Merkel visits Athens today for talks with prime minister Antonis Samaras, who is seeking an extra two-years for which to implement austerity measures.

“Merkel’s primary constituency is Germany, not Greece,” says Ralph Brinkhaus, a member of parliament from Merkel’s CDU party.

“She knows what millions of voters back home expect her to say…Merkel is on a carrot and stick exercise: show support and hope for the plight of Greeks with the reminder that there has to be a quid pro quo.”

Ratings agency Moody’s has downgraded Cyprus from Ba3 to B3, citing exposure of the countries’ banks to Greek debt. Moody’s maintains its negative outlook on Cyprus.

Britain meantime has also had its growth forecasts for this year and next cut by the IMF last night, which said that “countries with room for maneuver should smooth their planned adjustment over 2013 and beyond”.

“What we need in Britain is not ‘Plan B’,” countered British prime minister David Cameron.

“[That] is more borrowing. How can you borrow your way out of a debt crisis?”

Cameron instead called for a “Plan A+”.

Over in China, the world’s second-biggest gold buying country last year, the central bank “will make policy more pre-emptive, targeted and effective”, its governor Zhou Xiaochuan wrote in an article for the latest edition of central bank-published magazine China Finance.

“The external environment for our country’s economic growth is very grim,” wrote Zhou,” and downward pressure on the domestic economy remains relatively big.”

Ben Traynor | BullionVault

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