Gold is 'Living Up to Safe Haven Reputation'

Spot market gold prices hovered just below $1,720 an ounce Thursday morning in London – 2.4% up on last week's close – while stocks recovered some ground following losses yesterday, and the dollar ticked higher, as central banks in the UK and Europe left monetary policy unchanged. 

Silver prices hovered close to $32 an ounce – 3.4% up on the week so far – while other commodities edged higher. US Treasury bond prices gained while those for UK and German government debt fell. 

"Gold is holding up well in the face of dollar strength yesterday and today," says commodities strategist Walter de Wet at Standard Bank. 

A day earlier, the Dow Jones saw its biggest one-day drop this year on Wednesday, falling 2.4%. 

The S&P 500 also fell 2.4%, the biggest one-day drop since the start of June, as focus shifted to Congress's prospects of avoiding the so-called fiscal cliff of tax cut expiries and spending cuts currently scheduled for the start of 2013. 

Policies aimed at avoiding the fiscal cliff would mean that "the marginal income-tax rate is probably going to go up...from 35% to 40%, capital gains from 15% to 20%, dividends from 15% to who knows where," Bill Gross, co-chief investment officer at world's largest bond fund Pimco told Bloomberg Tuesday. 

"And ultimately if dividend and capital-gains tax rates go up, then stocks are worth less and that's what you’re seeing." 

In contrast with stocks, gold prices rallied yesterday after an initial drop at the start of US trading, holding onto most of their gains for the week so far. 

"Gold is displaying relative strength and living up to its reputation as a store of value and a safe haven," says this morning's commodities note from Commerzbank. 

"Gold ETFs tracked by Bloomberg saw their gold holdings surge by more than 4 tonnes to a new record high of 2592 tonnes." 

The European Central Bank left its key interest rate on hold at a record low 0.75 % Thursday.

In a speech in Germany on Wednesday, ECB president Mario Draghi argued that euro-zone inflation "is well contained" and that the ECB expects it to fall below 2% next year. 

In yesterday's speech Draghi also denied that a banking union would necessarily lead to cross-border deposit guarantees. 

"Organizing and funding deposit guarantee schemes can remain a national responsibility," said Draghi, "with comparable effectiveness." 

The Greek government narrowly won a vote in favor of fresh austerity measures last night. The vote was passed 153 to 128 out of a total of 300, while the two biggest coalition parties expelled seven members between them for failing to support the measures. 

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