Gold Investment Needs New Driver, Currently Under-Valued

The price of wholesale Gold Investment bars gave back a $5 rally in London for the second day running on Tuesday, ticking lower to last week’s finish at $1573 per ounce as the Euro currency also reversed its early gains.

European stock markets cut their rise but held 0.7% better by lunchtime, while commodity prices were broadly higher but the Silver Price fell to new 3-session lows beneath $28.30 per ounce.

US, UK, German and French government bonds rose yet again, pushing the annual yield on 10-year Bunds down to 1.35%.

Germany’s consumer price inflation was today pegged at 1.9% year-on-year by the official statistics agency, down from 2.1% in April.

Spanish retail sales fell last month by almost one-tenth year-on-year, new data showed. The cost of living in Spain, however, rose 2.1% on the official CPI measure.

“We still believe that gold has become increasingly undervalued,” says a note from South Africa’s Standard Bank, pointing again to $1640 per ounce as “fair value” in the Gold Investment market.

“Gold looks the healthiest metal currently,” says David Jollie at Japanese trading conglomerate Mitsui, “but new drivers may be needed to encourage the price back above $1600 and reinvigorate the rest of the precious metals.”

With Indian consumer demand still poor thanks to the weak Rupee, “We have seen other Asian physical buyers such as China pick up some of the slack, as well as central banks,” says Swiss refiner MKS’s trading desk in Sydney, Australia.

Shanghai shares rose 1.2% on Tuesday amid rumors of a new consumer stimulus package from Beijing.

An official told Reuters on Monday that rural workers and owners of small-engine cars will receive unspecified subsidies to encourage them to trade in their old vehicles for new.

Credit Suisse analysts forecast a stimulus package ranging from CNY1-2 trillion (up to $315bn) – around half the size of China’s 2008 program.

UK chancellor George Osborne will meantime not tax pies and other baked goods, the Treasury said overnight, losing £75 million per year ($110m) in extra revenue from the so-called “pasty tax” and other levies now reversed.

“[It] is true that a change [of policy] would weaken the government’s credibility,” writes Financial Times columnist Martin Wolf. “But this is because the government made an unwise commitment [to austerity].

“Cameron/Osborne are sharply tightening fiscal policy in the face of a depressed economy,” says New York Times columnist Paul Krugman – who is lecturing at the London School of Economics on Tuesday, and whose new book End This Depression Now! is apparently in its fourth printing in Spain.

“Britain is choosing to emulate both the United States and the troubled nations of Europe when it doesn’t have to – all in the name of an economic theory that was foolish two years ago, and completely discredited now.”

Irish Taoiseach Enda Kenny today warned that Dublin’s credit rating – already cut to “junk” status by Moody’s despite the €85 billion rescue in 2010 by the IMF, European Central Bank and European partner states – would be downgraded further if voters don’t back the new European fiscal treaty in Thursday’s referendum.

Peaking above 14% per year last summer, Ireland’s 10-year government bond yields today ticked above 6.0% in early trade.

Back in the Gold Investment market, “Support at 1532/22 has held once more and continues to underpin” the Dollar price, says the latest weekly chart analysis from Commerzbank in Luxembourg.

However, “We believe that this significant area will be retested in the months to come and that it will give way when this occurs.”

Spanish government bonds fell further Tuesday morning, pushing 10-year costs for Madrid above 6.5% after a spokesman was quoted saying that choosing between cash or newly-issued government debt to fund the latest €19 billion rescue of the Bankia lender was now only a “marginal” issue.

“The phrase ‘house of cards’ comes to mind,” says Georg Grodzki at London’s £391 billion Legal & General insurance and investment group.

“We do not believe that Bankia is unique [in Spain] in the extent of new losses identified,” the Financial Times quotes analysts at Rabobank, noting Friday’s restatement of 2011’s profits from a €309m profit into a €2.97bn loss.

Madrid is also “considering” allowing Spain’s regional governments – now some €140bn in debt – to issue joint bonds, guaranteeing them by setting aside tax revenues so that creditors are paid first, according to Bloomberg.

“It would provide some comfort to investors at a time when a guarantee from the Spanish sovereign is not exactly gold plated,” says Credit Agricole strategist Harpreet Parhar in London.

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