"Political Factors" to Drive Gold Bullion Market, ECB Bond Buying "Would Be Like Using Drugs"

Gold Bullion fell back below $1615 per ounce during Monday morning's London trading, the level at which it closed last week.

"The 11 week moving average comes in at $1601," say technical analysts at bullion bank Scotia Mocatta, pointing out that gold has now ended the week above that level for four weeks in a row.

Silver Bullion meantime failed to hold on to gains from Monday's Asian trading, falling back towards last week's close at $28.10 per ounce this morning in London.

Other commodities were broadly flat, with copper losing some ground, while European stock markets edged higher, with the exception of the FTSE in London, which was slightly down by lunchtime.

"The gold market this week is likely to be driven predominantly by political factors," says a note from Commerzbank.

Jean-Claude Juncker, head of the Eurogroup of single currency finance ministers, is expected to visit Athens Wednesday to discuss Greece's request for a two-year extension to its austerity program.

A day later, German chancellor Angela Merkel and French president Francois Hollande are due to meet in Berlin, while on Friday and Saturday Greek prime minister Antonis Samaras is expected in Berlin and Paris to continue discussions over extending the Greek program and possible additional aid.

"We cannot create yet another new program," said German finance minister Wolfgang Schaeuble on Saturday.

"It is not responsible to throw money into a bottomless pit."

The European Central Bank meantime is expected to discuss the possibility of setting interest rate limits on sovereign bonds when it meets next month, according to a report in Germany's Spiegel magazine. 

The limits would apply to so-called spreads over bunds – the difference between the interest rate on a given nation's government bonds and the yield of German government debt – and would trigger ECB intervention in the market, the magazine reported.

Were such a policy to be announced, "many in the market would still have doubts about whether the ECB has the capacity to make [it] work," says Elwin de Groot, senior market economist at Rabobank.

"[The ECB would need] to pledge unlimited purchases which I think does not really fit with their mandate."

"If we start doing that, we won't stop," said Germany's Schaeuble Saturday when asked about ECB bond buying.

"It's like when you start trying to solve your problems with drugs."

"Despite these objections we would not be surprised at all to see this spread limit idea used," counters Steve Barrow, head of G10 research at Standard Bank.

Here in London, the Bank of England was "naïve" to think that banks were not behaving dishonestly in making interest rate submissions to the Libor panel, the body that sets the interbank lending rate, a UK parliamentary report published Saturday says.

The report, entitled 'Fixing Libor: some preliminary findings', also expressed concern over Bank governor Mervyn King's role in the departure of Barclays chief executive Bob Diamond, who resigned last month after Barclays was fined for interest rate manipulation.

"Whatever the merits of the action taken by the Governor of the Bank of England and the Chairman of the [Financial Services Authority]," the report says, "the action they took has exposed implicit, and potentially arbitrary, power to force out senior figures in the financial services industry. The return of the 'Governor's eyebrows...comes with the need for corporate governance safeguards."

Over in New York, the so-called speculative net long position of Gold Futures and options traders – calculated as the difference between the volume of bullish and bearish contracts – fell slightly over the week ended last Tuesday, figures published Friday by the Commodity Futures Trading Commission show.

By contrast, the world's biggest Gold ETF, the SPDR Gold Trust (GLD), saw its biggest one-day net inflow since last November on Friday. The volume of Gold Bullion held to back GLD shares rose by 0.9% to 1274.7 tonnes – the highest level since July 9.

Here in London, volume of Gold Bullion transferred between major bullion banks fell by 6.4% in July compared to a month earlier, according to London Bullion Market Association clearing statistics released Friday. Year-on-year the fall was 9%, although the number of individual transfers rose by nearly a third.

The volume of Silver Bullion transferred also fell last month, down 5.3% from June and 11.5% year-on-year.

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