Gold Monthly Update - June 2012: Europe in Focus

Germany is obstinately opposed to regionalization of sovereign debt and remains stubborn on fiscal austerity measures for the region.

January 01, 1970 5:30 IST | India Infoline News Service

Gold has relatively managed to withstand the broad based sell-off this month, while various complexes (categorically energy) registered substantial decline. The yellow metal remained underpinned by subdued US macroeconomic numbers, coupled with the recessionary conditions in Europe. Such backdrop increases the likelihood of imminent monetary easing on both sides of the Atlantic (Europe & US). However gold bulls got disappointed, when US Federal Reserve preferred to stay put regarding another round of quantitative easing, as the apex body would like to monitor further slew of macroeconomic numbers before undertaking any substantial step.

In Europe, the results of the second round of elections in Greece were in line with the market expectations, with the two pro-bailout parties (New Democracy & Pasok) garnering sufficient votes between them to form a working coalition. Conversely, the Greek elections euphoria has faded away and the market focus has shifted to rising sovereign bond yields and banking woes in Spain. Deteriorating conditions are evident in the European debt market, where 10-year yields on Spanish paper have soared above 7%. The country is virtually isolated out of the debt market. In addition to Spain, there are growing concerns about Italy’s high sovereign borrowing costs, which can compel the nation to resort for a financial rescue.

Gold prices are currently trading directionless, as markets are adopting a wait and watch policy before the outcome of the much anticipated European economic summit. Uncertainty regarding the outcome of EU summit has kept the market participants clueless. There were growing apprehensions on whether European officials would come up with the some concrete measures at the regional economic summit during this week. However rumor mills are churning reports that the Europeans have made certain progress in resolving their differences. European officials are reported to come up with a plan for a single financial supervisory mechanism for the region. The mechanism will involve the possibility of ECB providing direct recapitalization for European banks.

On domestic price action, gold prices contrastingly have witnessed handsome gains as a substantially weaker Indian rupee has escalated the landing costs of the yellow metal. In this regard, INR has depreciated by 6% on YTD’12 and 26% on yoy basis. Effectively domestic spot prices have appreciated by 8% on YTD’12 & 35% on yoy basis

In spite of the recent developments in Europe, things are not clear yet as Italy and Spain are reportedly conflicting an agreement on measures to promote growth, arguing that action first be taken to lower regional interest rates. In this regard, Italy and Spain wants Germany to use stabilization money to buy sovereign debt instruments, effectively reducing yields. Conversely, Germany is obstinately opposed to regionalization of sovereign debt and remains stubborn on fiscal austerity measures for the region. We continue to advocate investors to refrain from taking any significant positions ahead of the outcome of the summit and wait until the dust settles down.

Gold Snapshot
  Jun-12 May-12 mom (%) Jun-11 yoy (%) YTD (%) Avg'12 Avg'11
*Price (US$/ounce)

Spot Gold 1,568 1,563 0 1,500 4 0 1,651 1,573
COMEX Gold 1,566 1,563 0 1,503 4 (0) 1,652 1,572
MCX Gold 29,639 29,117 2 21,904 35 8 28,533 23,995
US Dollar Index 82 83 (1) 74 10 2 80 77
Spot INR 56.4 56.2 0 44.7 26 6 52.3 46.7
 Source: Bloomberg, India Infoline Research  
* Prices as on 29
th June, 2012

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