Gold Price Erases Dollar Gains, Drops 5% vs. Euro

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By Adrian Ash | January 15, 2011 1:36 AM EST

Spot Gold prices continued to slip for Dollar investors in London dealing on Friday, trading unchanged from last week's finish as world stock markets also fell.

US crude oil contracts pulled back 1% to $90 per barrel, and Silver Bullion prices gave back the last of this week's 5% rise vs. the Dollar.

The Euro extended its rally on the currency markets, spiking to a 4-week high vs. the Dollar of $1.3450 before easing back.

Gold priced in Euros dropped almost 5% from Monday's near-record high.

"It would appear as the 'long gold' trade is being dented by expectations of rising interest rates," says Stephen Gallo, analyst at Schneider FX in London.

Compared to the Dollar or British Pound, "We believe that the European Central Bank and Euro would have the upper hand if the markets began to actively seek out inflation hedges vis-à-vis the currency markets," he says. "We suspect there is a store of value trade taking shape."

ECB president Jean-Claude Trichet said yesterday that "We see evidence of short-term upward pressure on overall inflation, mainly owing to energy prices."

Eurozone inflation for Dec. was today pegged at 2.2% annually. By Friday lunchtime in Frankfurt, the Euro stood more than 4% higher against the Dollar from last week's finish.

Holding rates at a record low of 1.0%, however, "Inflation expectations remain firmly anchored," Trichet went on, adding that "overall, the current monetary policy stance remains accommodative [thanks to] the provision of liquidity" to Eurozone banks.

At his monthly press conference, Trichet also declined to comment on the central bank's Portuguese bonds purchases - now thought to total 20% of all Lisbon's debt in issue.

Madrid newspaper El Confidencial said today that Spain is preparing a €30-80bn cash injection to recapitalize its "caja" saving banks outright.

Spanish banks raised their ECB debts to €70 billion in Dec. from €64.5bn in Nov., and the Fitch Ratings agency now expects the central bank's "non-conventional" liquidity support for Eurozone banks to be extended indefinitely.

New data today said the 17-nation currency zone's trade balance unexpectedly turned negative last month.

Input price inflation for UK industry meantime leapt to 12.5% year-on-year.

The Gold Price in Sterling sank towards an 8-week low of £861 per ounce as the Pound rose on expectations of higher interest rates ahead.

"Thursday's action was marked by a significant divergence from the usual [inverse] Dollar correlation," says a wholesale bullion dealer, noting the falling Gold Price in Euros.

"Gold's dip in price in early January has triggered substantial physical buying in the major purchasing centres," says the new monthly metals report from Walter de Wet's team at Standard Bank.

"The physical market is strong, given these price levels. [But] the Chinese New Year is February 3rd, so early February may well be nervous in thinner conditions."

"Seasonal demand for physical gold is strong," agrees a Hong Kong dealer, but in the Gold Futures market, "the silence is deafening."

Looking further ahead, "If we are correct in thinking that a gradual tightening of financial  onditions around the world will put increasing stress on economies suffering from elevated levels of inflation or which are otherwise financially vulnerable, this may become a new source of interest for the gold market," says French bank Natixis in its Commodities Weekly.

Citing the 27% drop in Bangladesh stocks this week, plus the "increasing scrutiny" of US state and municipal debts, "we may be rapidly approaching a new set of potential crises against which investors may seek the safe-haven value of holding gold."

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