Central Banks Buy Gold

The price of gold climbed above $1,772 yesterday but promptly consolidated around $1,762 as the dollar gained strength and the euro zone continued to collapse.

The dollar’s climb was thanks to CB Consumer Confidence data coming in at a seven-month high, much greater than expected.

Bank Of Spain Warns
Euro-zone woes continued as protests against Rajoy’s cuts became more violent than those seen previously. The Bank of Spain has also released a warning stating Q4 GDP will fall by a significant rate compared to that in Q3 2012. This morning, the overnight protests in Spain have sent jitters around the markets as investors begin to realise that a country with 25% unemployment is not one which can be rescued thanks to a quick bailout.

Analysts expect to see further disruption over in Greece where an austerity package, proposing the equivalent of 5% of GDP in cuts, is being finalised. A general strike is happening today, prompting mass gatherings in Athens. Meanwhile, Merkel and Lagarde are also due to meet to decide what to do about the ‘financing gap’ only just discovered in the EU-IMF sponsored programme.

EUR/USD
The uncertainty and increasing instability in the Euro zone led to the euro falling to a two-week low against the U.S. dollar.

Bang on trend for this year, it was reported that some central banks continued to add to their gold holdings over the summer. IMF data shows South Korea added 16 tonnes in July, Kazakhstan increased holdings by 1.4 tonnes whilst Paraguay added a few thousand ounces to take holdings to just above 8 tonnes. For this year in total Turkey remain the top gold purchaser; having increased reserves by 100.2 tonnes.

Regulation looks like another topic that will be coming up for debate once again, because it’s not as if countries have got more pressing things to be dealing with at the moment. The IMF appears to be mulling over the idea of a global banking ring-fence around retail and investment banking operations. This is as they believe new regulations are failing to end the ‘too big to fail’ issue.

Time To Buy
Now is proving to be a good time to buy gold as it sits in this consolidation period waiting for the next round of stimulus or disruption in order to drive it past $1,800. Analysts remain bullish on gold as the poor economic backdrop is not something which will be fixed in the near future.

The silver price remains on track for the best three months since Q4 2010, with a rise of 23.5%. Silver potentially offers greater returns to investors and it can be argued that it is in a better position to reach new highs due to its attractiveness to speculators.

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