German Bonds "Not Behaving Like Safe Haven" as Spain Yields Rise Further, Rupee Gold Prices Set New Record

Gold Prices spiked to $1627 per ounce shortly before Thursday's US session – their highest level this week – immediately after the publication of US economic data. 

Silver Prices by contrast continued to trade sideways, hovering around $29 an ounce – around 1.6% up on where they started the week.

US consumer price inflation fell to 1.7% last month – down from 2.3% in April – according to official figures published Thursday. This week's initial jobless claims meantime were 386,000 higher than many analysts expected. 

A day earlier, official data showed the producer price index, regarded by many as an indicator of commodity price inflation, fell 1.0% in May, while retail sales were down 0.2%.

The Federal Open Market Committee meets next Tuesday and Wednesday to decide on any changes to US monetary policy.

"Once there's evidence that the policymakers on the monetary side are going to have to release stimulus, we should see rising interest in gold and silver," said Jeremy Friesen, Hong Kong-based commodity strategist at Societe Generale, speaking before Thursday's US data was released.

"We feel that [a third round of quantitative easing] is still unlikely at present," counters Marc Ground, commodities strategist at Standard Bank, in a note this morning.

"The best prospect for Fed monetary accommodation coming from an extension or "Operation Twist" and perhaps pushing out their expectations of when rates would be hiked."

Earlier on Thursday, Gold Prices traded within a $5 range around $1620 an ounce throughout London's morning session, while stocks and commodities traded lower during following more negative ratings action in the Eurozone.

Ratings agency Moody's last night cut its sovereign ratings for Spain and Cyprus. Spain was cut three notches to Baa3 – one notch above junk – while Cyprus fell further into junk territory when its rating was cut to Ba3.

"Moody’s believes that the debts of Euro area sovereigns that are fully dependent upon official sources to fund their borrowing requirements represent speculative-grade risk," said a statement from the ratings agency.

The Eurogroup of single currency finance ministers confirmed on Saturday that Spain will borrow up to €100 billion from Eurozone rescue funds to finance its banking sector restructuring.

Spanish 10-Year bond yields this morning came within touching distance of the 7% mark, hitting a fresh Euro-era high at 6.998%.

Italy meantime successfully auctioned €4.5 billion in government bonds of varying maturities. Borrowing costs however were higher than last month. The gross yield on three year bonds for example rose to 5.3%, up from 3.91% in May.

Yields on German government debt meantime continued their recent rise Thursday, breaching 1.5% – up from an all-time low of less than 1.13% at the start of the month.

"All eyes are on Germany," Chancellor Angela Merkel told the German parliament this morning, adding that the Eurozone crisis is likely to dominate this weekend's G20 summit.

"[But] Germany’s power is not infinite...We must all resist the temptation to finance growth again through new debt."

"German bund yields [are this morning] behaving more like periphery bonds rather than a safe haven," says a note from UBS, pointing out that German bond yields have been rising faster than those on UK government debt.

"Of course, it is too early to make any conclusions about German bonds losing their safe-haven value...but such a scenario, wherein bunds lose some of their safety appeal, would mean investors would be on the lookout for new 'secure' places to park their money, and given the much-reduced list of alternatives, gold would be one of the top options."

Based on London Fix prices, the Gold Price in Euros rose to within 5% of its all-time high on Wednesday, dipping slightly to €1289 per ounce at this morning's fixing. 

On the currency markets, the Euro traded sideways Thursday morning around $1.256.

"The Euro has been relatively stable as we head into [this Sunday's] Greek election and that will dictate market direction next week," reckons Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

"The situation in Europe," Federal Reserve chairman Ben Bernanke told Congress last week, "poses significant risks to the US financial system and economy and must be monitored closely." 

"As always, the Federal Reserve remains prepared to take action as needed to protect the US financial system and economy in the event that financial stresses escalate."

Bernanke is due to give a press conference next week following the FOMC meeting on Wednesday.

Switzerland's central bank meantime repeated that it will buy "unlimited quantities" of foreign exchange in order to prevent the Swiss Franc rising above its peg to the Euro at SFr 1.20.

The Swiss National Bank today announced it is keeping its interest rate on hold at 0.0%.

"In the foreseeable future, there is no risk of inflation in Switzerland," said a statement from the SNB.

Over in India, traditionally the world's biggest source of private demand to Buy Gold, newspapers report Gold Prices in Delhi hit a new all-time high of Rs 30,550 per 10 grams Thursday, with some dealers citing buying by gold jewelers ahead of the upcoming marriage season.

Dealers elsewhere in Asia however reported "sluggish" demand, according to newswire Reuters.

"June is a quiet month for jewelers' demand," says Dick Poon, precious metals manager at bullion refiner Heraeus in Hong Kong, adding that investors are only Buying Gold "on dips".

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