Precious Metals Prices Downtrend Threatens Support

Gold prices climbed to $1,660 per ounce Wednesday morning in London – in line with where they ended last week – before drifting lower ahead of US open, while stock, commodity and government bond prices were broadly unchanged following news that the UK government deficit rose sharply last year.

Silver prices meantime dipped below $32 per ounce around lunchtime – a 1.8% drop on the week so far.

"Silver is in a short-term downtrend and is likely to breach support...at $31.81," says the latest technical analysis note from bullion bank Scotia Mocatta, who add that the next target would be $30.48.

Over in India, the strike by gold dealers in protest at last week's gold import duty hike entered its fifth day Wednesday.

"We harbor little doubt that gold remains vulnerable," says a note from UBS precious metals analyst Edel Tully.

"Upside drivers are lacking and physical markets have yet to show a convincing response to lower prices."

Here in the UK, the latest Bank of England Monetary Policy Committee minutes published on Wednesday show that two of the nine MPC members voted in favor of expanding the Bank's quantitative easing program by £25 billion when the MPC met earlier this month. The majority voted to maintain the size of the program at £325 billion.

The decision to leave interest rates at 0.5%, where they have been since March 2009, was unanimous.

The MPC minutes noted significant risks to economic activity that might result in inflation falling materially below the [MPC's 2%] target in the medium term".

MPC member Spencer Dale however, who voted to six times for a rate increase in 2011 – said in a speech Tuesday that in his view "inflation is just as likely to be above as below the inflation target in the medium term".

The UK government deficit meantime rose to £12.9 billion last month – more than double consensus estimates – figures published hours before Wednesday's budget show.

Lower tax receipts contributed to the deficit growth, the Financial Times reports, with HM Revenue & Customs data showing an 8% fall in self-assessment tax revenues compared to February last year.

The news "provides a very uncomfortable background for the budget," says Investec economist Philip Shaw.

"The fact there has been a worsening on this scale is a big surprise."

Britain is expected to issue the second largest amount of government debt – known as gilts – on record this coming fiscal year, according to a Bloomberg survey of primary bond dealers.

"The government has a tough balancing act," says John Wraith, London-based fixed-income strategist at Bank of America Merrill Lynch.

"Growth is going to be at best anemic, and it's going to take a long time to reduce gilt issuance. They need to reduce debt, but if they stick rigidly to their fiscal consolidation plan, they risk killing growth."

The FT argued this week that UK policymakers are engaged in financial repression, holding interest rates below inflation and creating a captive market for government bonds in an effort to lower the real value of national debt.

Federal Reserve chairman Ben Bernanke will warn of the US financial system's exposure to Europe when he appears before the House Oversight Committee today.

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