PM Prices Head for Week’s Gain despite China Slowing

China's central bank has cut reserve requirement ratios – the amount banks need to hold in reserve as a proportion of their assets – twice in the last six months. New loans last month were over 1 trillion yuan, their highest level for a year.

Here in the UK, so-called “factory gate” inflation – the price of outputs as measured by the producer price index – fell to 3.6% last month, down from 4.1% a month earlier.

Over in Europe meantime, German consumer price inflation was 2.1% in March – compared to February's 2.3%.

The European Central Bank is more likely to resume buying government bonds on the open market through its Securities Markets Programme than hold a third three year longer term refinancing operation (LTRO), according to a survey by newswire Bloomberg.

"Market stresses will eventually force the ECB to restart the bond program, but it's not imminent," reckons Ken Wattret, chief euro area economist at BNP Paribas in London.

European banks borrowed over €1 trillion in total at the LTROs held in December and February. Banks in Spain – which last month borrowed a record €316.3 billion from the ECB through its other liquidity channels, double February's figure – are thought to have used a lot of this funding to buy Spanish government bonds.

Benchmark yields on Spanish 10-Year bonds dropped from over 6.5% last November to less than 5% earlier this year following the announcement of the LTROs – though they have since risen again and are currently just below 6%.

"There is mounting evidence that the LTRO is pretty toxic for banks and isn't working,” says James Nixon, a former ECB official now chief European economist at Société Générale in London.

"I don't think there will be another one."

"Something is wrong when you load up on assets that were considered risky in November and deemed un-risky in January," adds Royal Bank of Scotland chief European economist Jacques Cailloux.

"Now we're seeing the worst you could have hoped for. As soon as the situation of the sovereign worsens, banks will come under additional market pressure. That's extremely negative."

"Given the return of the debt worries," says a note from Swiss bullion refiners MKS, "gold will likely remain underpinned in the coming sessions. Nevertheless, one should keep in mind that the metal still remains capped by its overhead trend line resistance of $1,680."

"But in order to capitalize on Europe's renewed woes," adds UBS, "gold needs to start behaving as a safe haven again. A one-day performance is not enough."

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Ben Traynor is editor of Gold News, the analysis and investment research site of gold ownership service BullionVault. He was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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About the Author
Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVaultBen Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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