Traders Own

European markets have had a markedly softer tone today as we head into month end, as concerns about weakening economic data outweigh speculation about further easing from central banks. Spanish GDP for the first quarter confirmed that last week's expectation that the Spanish economy was in recession, while the downgrade of Spanish banks by S&P filtered into the negative tone.

Recent speculation that EU ministers were looking at steps to refocus a policy response more towards growth was shot down by the EU commission who stated that recent press speculation about alternatives to austerity were wide of the mark, and that there was no substitute to fiscal consolidation.

The technology sector has proved to be the biggest faller in the UK, while hedge fund manager Man Group (EMG LN) has continued its recent roller coaster price action, dropping to the bottom of the FTSE ahead of its latest trading update tomorrow as investors book some profits after recent gains.

On the flip side sector peer and FTSE new boy Aberdeen Asset Management (ADN LN) is near the top of the index after reporting H1 pre-tax profits of £162.2m as well as a 9% rise in funds under management.

Gold and silver miners have also had a rough day with Fresnillo (FRES LN) and Randgold Resources (RRS LN) near the bottom of the index. ARM Holdings (ARM LN) continues to struggle near six month lows as Apple shares struggle to stay above $600.

U.S. markets opened lower this morning on the back of a weaker European session. Personal income and spending data for March came in pretty much as expected reinforcing the slightly weaker tone from Friday's GDP numbers. The latest Chicago PMI data for April also painted a slightly weaker tone after the gains of recent months, dropping back sharply from 62.2 in March to 56.2, well below expectations of 60.

The Dallas Fed painted an even more dismal figure contracting 3.4, well below expectations of a +8 reading. Speculation about further QE has been tempered by the fact that it won't happen before June given that is when the next Fed meeting is due to be held.

In earnings news, NYSE Euronext reported a slump in Q1 earnings of 32%, as trading activity showed a broad slow down across its exchanges. It did take a $16m charge on its failed bid for Deutsche Boerse.

Despite speculation about further QE the U.S. dollar has recovered some ground today, with the Euro once again struggling near its recent range highs, below the 1.3300 level. The downgrade of a number of Spanish banks by S&P as well as confirmation of a double-dip recession has capped the upside to a certain extent.

The weaker tone in equity markets has seen commodity currencies take the biggest hit, with the Canadian and Australian dollar both dropping sharply. The Canadian dollar slid sharply after monthly GDP contracted by 0.2% well below market expectations of a 0.2% gain, and reducing speculation that had been doing the rounds in some quarters of a possible rate hike.

Rate speculation has also hit the Australian dollar today ahead of tomorrow's likely decision by the RBA to cut rates by 0.25%. There is an outside chance of a 0.5% cut, while a cut of 0.25% could well see a small bounce, after the fact.

Gold prices have slipped back sharply after last Friday's GDP bounce on speculation of reduced demand out of emerging markets, particularly India, while a number of analysts revised down their 2012 forecasts for the yellow metal. Despite the fall speculation about further QE is likely to limit the downside.

Brent prices look set to post their first monthly decline this year on speculation that slowing demand in Europe will weigh on demand as geopolitical concerns out of the Middle East wane. U.S. prices on the other hand have continued to tread water as speculation about further QE underpins while the topside remains limited on concerns about the recent slowdown in US economic data.

Copper prices have edged higher ahead of manufacturing PMI data out of China, which is due early tomorrow morning as well as an expectation of an RBA rate cut.

Spot market gold bullion prices held above $1660 an ounce during Monday's morning trading London – holding on to gains from last week of 1.1% – while stock markets ticked lower, commodities were broadly flat and US and German government bonds gained as Spain continued to generate headlines.

"On the physical front [however] things were looking not as one might have hoped for [last week]", says a note from Swiss bullion refiner MKS.

"There's no support from the physical market," one Hong Kong dealer told newswire Reuters this morning.

Prices for silver bullion fell this morning to $31.10 per ounce – 0.6% down on Friday's close.

Gold bullion prices in Euros meantime hit their highest level in almost two weeks this morning, touching €40,474 per kilo (€1259 per ounce) as the Dollar made up some lost ground against the Euro.

Earlier on Monday, the US Dollar Index – which measures the Dollar's strength against a basket of six other currencies – fell to its lowest level in almost a month, continuing last week's slide.

The Dollar's slide was compounded on Friday after preliminary gross domestic product data showed the US economy had slowed by more than expected in the first quarter of 2012, leading to speculation that the Federal Reserve might embark on a third round of quantitative easing.

"We don't know whether there will be QE3," the Hong Kong dealer said.

"If the economic performance continues to be good, then there will be a diminishing prospect for QE."

"In the short run, you can have one or two weeks for the market to get excited about QE," adds Dominic Schnider, Singapore-based head of commodity research at UBS Wealth management.

"If you look for QE, we are going to have a situation where prices will trend higher."

The Spanish government is in talks to set up a "bad bank" scheme, which would see troublesome property loans taken of banks' books and transferred to new asset management companies, the Financial Times reports.

Spanish GDP meantime fell by 0.3% in the first quarter of the year, according to official data published Monday. This is less than the 0.4% forecast by the Bank of Spain last week.

The government in Madrid forecasts that Spain's economy will contract by 1.7% in 2012, before growing 0.2% next year. The government has set a deficit-to-GDP target of 5.3% for this year, and 3% for 2013.

By contrast, ratings agency Standard & Poor's – which last week downgraded Spain's sovereign rating from A to BBB+ – said last week it expects negative growth both this year and next, with the deficit-to-GDP ratio hitting 6.2% this year and 4.8% next.

"It's likely [Spain's government will] have to create more fiscal tightening," says Citi economist Guillaume Menuet.

"That's going to be counterproductive."

S&P followed the sovereign downgrade on Monday by taking negative rating actions on 16 Spanish banks. Several banks had their debt ratings cut, among them Santander, while others were placed on CreditWatch negative, a move which often precedes a downgrade.

Despite the downgrades, Spanish 10-Year bond yields remained below 6% this morning, a level they breached for the first time in the Euro era last July, and above which they have traded at several points over the last month.

In France meantime, incumbent president Nicolas Sarkozy has closed the gap on his Socialist Party opponent Francois Hollande, according to a poll published Monday.

The Ipsos poll, for which voters were surveyed on Friday and Saturday, shows Sarkozy still lags Hollande, with only 47% of the vote ahead of this Sunday's runoff.

"Sarkozy has moved further to the right," says the Wall Street Journal, "repeatedly underlining his strong line on immigration and a pledge to strengthen France's borders in an attempt to pick up the first round share of almost 18% achieved by Front National's Marine Le Pen."

"Austerity alone won't help cut debt," Hollande told his supporters at a rally yesterday.

"The head of the [European Central Bank] can also see [this]. They are starting to hear what we are saying."

German chancellor Angela Merkel however said at the weekend "there will be no new negotiations on the fiscal pact", referring to the Fiscal Stability Treaty agreed by 25 of the 27 European Union members, which states they will seek to bring their budgets into balance or surplus, with counter measures being triggered should they miss agreed targets.

Over in Greece, where voters are also due to go to the polls this Sunday, the Golden Dawn party – whose leader has been filmed making a fascist salute – may be set to enter parliament for the first time, Bloomberg reports.

In New York meantime, the difference between bullish and bearish contracts held by noncommercial gold futures and options traders on the Comex – the so-called speculative net long – fell 5% in the week ended last Tuesday, according to Commodity Futures Trading Commission data published late Friday.

Long positions fell by the equivalent of 9.4 tonnes of gold bullion, while at the same time short positions rose by the equivalent of 13.6 tonnes

Ben Traynor
BullionVault

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it

The latest Q1 GDP data from Spain is expected to confirm that the country has slipped into a double dip recession, with expectations of a contraction of 0.4% in the first quarter. Coming, as it does on top of record unemployment data last week, as well as massive demonstrations against austerity on the streets yesterday, the problems for European leaders continue to mount up.
 
Talk of creating a “bad bank” for distressed Spanish property loans has been talked about, given the refusal of Spanish ministers to accept the need for a bailout for its debt soaked banking system. Given continued rises in unemployment and a crashing economy Spanish ministers may be faced with no other choice but to accept some form of bailout whether they like it or not.
 
In some ways Spain can take some comfort that it’s not unique in its problems and the fact that it joins pretty much the rest of Europe, excluding Germany and France in recession, however it doesn’t change the fact that European leaders need to come up with a plan for growth, and quick.
 
The need for a change of plan away from the austerity approach of debt reduction already appears to be gaining traction, after ECB President Mario Draghi expressed the need for a growth pact last week. It would appear that with governments falling like dominos, EU leaders appear to be waking up to the fact that they are ultimately accountable to their people’s wishes.
 
With changes of government likely in France and Greece in the next seven days the direction of the debt crisis could take a very different path in the next seven days. Even regional elections in Italy could well mark the end of the honeymoon period for Italian PM Mario Monti as populations pay the price for years of economic mismanagement.
 
Last week’s lower than expected U.S. GDP number has reignited the inevitable speculation about the likelihood of further QE from the Federal Reserve. In some ways today’s PCE data should be instructive given that it is the Fed’s preferred measure for inflation targeting. The annualised core measure is expected to remain at 1.9% in March, while the monthly figure is expected to rise slightly to 0.2%. Any figure hotter than that is likely to see the hawks on the FOMC reiterate their opposition to further easing measures in light of the inflation risks.

Personal income and personal spending for March is expected to reinforce concerns about consumer finances with incomes fairly flat around 0.2% while personal spending is expected to slip back from 0.8% in February to 0.4%, suggesting that even if consumers are spending it is coming from savings, or credit.
 
EURUSD – while the trend line resistance at 1.3290 from the March highs caps the onus remains for a continuation of the sideways consolidation seen since mid-February. A break through 1.3300 targets the 200 day MA at 1.3480. The lower line support on the triangle now lies at 1.3050, while there is also trend line support from the 1.3000 April lows at 1.3175. The break of the larger triangle continues to remain the primary pattern and could well signal a 500 point move if it breaks out. To open up the lows this year at 1.2630 we need to see a concerted break below 1.2975.
 
GBPUSD – the positive momentum pushing the pound higher continued for the tenth day in a row last week sending it nearer to the trend line resistance at 1.6330 from the 2011 highs at 1.6750. There is a concern that momentum is now starting to look a touch overbought, despite the bullish signals being given off from both the daily and weekly charts. This suggests a downward test is somewhat overdue towards 1.6050. Only a move below 1.6050 retargets the long term trend line support at 1.5910 from the January lows at 1.5235 which continues to act as support on the downside.
 
EURGBP – the Euro continues to weaken and will continue to do so while below the resistance at the 0.8220 area. The onus remains towards the downside and a move towards the 2010 lows at 0.8065 as the next target. Only above 0.8220 would retarget the larger resistance at 0.8280 as well as trend line resistance at 0.8300 from the February highs at 0.8505.
 
USDJPY – last weeks close back inside the weekly cloud and below the 80.45 cloud support is a concern with respect to the recent upward momentum and suggests that we could well see further losses. The risk of a move towards 79.70 initially has increased in the short term and any move could now extend towards 79.20. For downside pressure to diminish the U.S. dollar does need to break back and close the week back above the weekly cloud at 80.50 and then advance beyond the three weeks highs at 81.85/90.

European markets have held up fairly well despite last night’s sovereign downgrade of Spain by Standard & Poor’s, with the larger focus being on the more positive side of the equation, and some fairly positive company updates.

The disappointing U.S. Q1 GDP update has once again prompted speculation that the Federal Reserve be prompted to ease monetary policy further, as markets look towards another liquidity shot. Given the tone of the FOMC meeting earlier this week they could well be headed for disappointment but investors appear to be focussing on the comments that the Fed remained ready to act, keeping a floor under the market. The main unknown remains with respect to the height of the bar that would prompt further action.

Positive broker comment has driven gains in fund manager Man Group (EMG LN) as the company posts its first positive week in six weeks on a combination of bid speculation, and improved broker sentiment. The construction sector has received a boost with building group CRH (CRH LN) helped higher by a ratings upgrade while British Land (BLND LN) is also higher. Banks are leading the markets higher in the UK led by Barclays (BARC LN) despite a shareholder revolt over pay at its AGM.

On the downside, Costa Coffee owner Whitbread (WTB LN) is lower giving up some of yesterday’s gains after good results yesterday. Defensive telecommunications are also underperforming with Vodafone (VOD LN) and BT Group (BT.A LN) both lower.

U.S. markets opened higher today despite the latest Q1 GDP number coming in shy of expectations at 2.2%, below the 2.5% expected by analysts. The low number was offset by the final University of Michigan confidence survey which came in at 76.4, well above expectations of 75.7, and the highest level for over a year. Personal consumption did jump sharply rising 2.9%, well above expectations of 2.3%, suggesting that the warmer weather may have seen some Q2 spending brought forward.

It appears that markets are hoping that the weaker print could well prompt further easing sooner rather than later, given that Bernanke said the Fed remained ready to act. The main unknown remains with respect to the height of the bar that would prompt further action. Follow through remains muted however as markets slide back from their intraday highs ahead of the weekend as well as next week’s U.S. payroll reports.

U.S. company earnings continue to come out on the positive side with a whole host of positive updates keeping the market well supported. Ford beat expectations in Q1 coming in at $0.39c a share, above expectations of $0.35c, on the back of increased revenues. Proctor & Gamble also beat expectations for Q3 of their fiscal year, coming in at $0.94c a share. This was above expectations of $0.93c a share, however revenues were slightly below expectations. Merck also came out with Q1 figures above expectations on earnings and revenues.

The U.S. dollar has been the currency markets whipping boy again today helped on its way by the poor GDP print prior to the U.S. open on expectations that the Fed could well ease further in the event the economy weakens further. As a result the commodity currencies have risen sharply with the Australian and New Zealand dollar the main gainers.

The Japanese yen has also pushed higher after the Bank of Japan eased monetary policy but not by as much as the market had expected injecting a net 5trn yen.

The Pound is also higher, hitting new 22 month highs against the Euro and seven month highs against the U.S. dollar.

Gold prices have edged higher after this afternoons GDP number from the U.S., came in light prompting concerns about further loose policy from the Fed, while silver prices have also pushed higher for the same reason.

Unusually oil prices have failed to follow through on the weaker U.S. dollar theme, with demand concerns on slowing economic data outweighing QE speculation.

Copper prices also pushed higher after the GDP data predominantly on the back of the weakness in the U.S. dollar.

Spot market prices to buy gold remained steady around $1650 an ounce during Friday morning's London trading – well within their range from mid-March – as stock markets and commodity prices were also flat and US Treasury bonds gained following a credit ratings downgrade for Spain.

Heading into the weekend, gold looked set to record its seventh successive Friday PM gold fix between $1600 and $1700 an ounce.

Prices to buy silver meantime held above $31 an ounce this morning after rallying in Thursday's US trading – though they remained 2% down on the week by Friday lunchtime in London.

"Our concern with silver," says the latest precious metals note from investment bank Natixis, "as with gold, is that when global markets begin to return to a greater degree of normality, the outflow from investors may be substantially larger than the inflow from industrial or jewelry demand, which could lead to substantial weakness in silver and gold prices."

Ratings agency Standard & Poor's last night downgraded Spain two notches from A to BBB+, adding that the outlook for the sovereign is 'negative'.

"The [Spanish] government has committed to a target of 5.3% of GDP in 2012 and 3.0% in 2013," said an S&P statement.

"In our opinion, these targets are currently unlikely to be met given the economic and financial environment. We forecast a budget deficit of 6.2% of GDP in 2012 and 4.8% in 2013."

Yields on 10-Year Spanish government bonds rose to touch 6% this morning, but by Friday lunchtime actually looked set to close slightly down on the week.

German 10-Year bund yields meantime fell as low as 1.65% Friday morning, close to record lows hit earlier in the week.

Despite the Spanish downgrade, European stock markets edged higher this morning, although the Euro Stoxx 50 index of the leading Eurozone blue-chip firms remains more-or-less where it was six months ago.

"We are probably going to see more downgrades from other rating agencies," reckons Philippe Gijsels, Brussels-based head of research at BNP Paribas Fortis Global Markets.

"You will continue to see this consolidation phase [in stocks] for some more time as the newsflow is likely to be predominantly negative."

"Europe is headed to a suicide," said Nobel Prize-winning economist Joseph Stiglitz Thursday.

"There has never been any successful austerity program in any large country...the European approach definitely is the least promising."

French Socialist Party leader Francois Hollande, who received the highest share of the vote in last Sunday's French presidential election first round, called this week for European economic policies to prioritize growth rather than austerity, adding that he would hold a "firm, friendly discussion" with German chancellor Angela Merkel if elected.

"It's not for Germany to decide for the rest of Europe," Hollande told French television last night.

Earlier in the week, Hollande said the European Stability Mechanism, the permanent bailout fund due to come in in July, should be given "the necessary firepower" by the European Central Bank.

"I've always campaigned for the statute of the ECB to be revised," Hollande said.

"I know Germany's reticence, but it would be better for the ECB to be able to intervene as the first and last resort for states."

"Herr Hollande has misunderstood the problems in his country and in other Euro area countries," Michael Meister, a member of Merkel's CDU party, told Bloomberg Friday.

"If one throws money into a country with structural problems that won't solve those structural problems...the aim is to gain control over excessive debt, not increase it."

"A growth pact has to be focused on structural reforms," agreed Spain's economy minister Luis de Guindos yesterday.

"I do not see that the growth pact should involve any sort of fiscal boost or stimulus."

The Euro meantime rallied against the Dollar in Friday morning's European trading, climbing back above $1.32.

"The Euro/Dollar has held above $1.30 for some time, in the $1.30-$1.32 range, which coincides with gold also being caught in a range," says Robin Bhar, head of metals research at Societe Generale.

"If the Eurozone crisis deepens and we see the Euro/Dollar correct below $1.30, that could give a bit of a lift to gold."

The Pound also rallied against the Dollar Friday, hitting breaking through $1.62 to hit its highest level since last September.

Prices to buy gold in Sterling fell to £1019 an ounce – 0.6% below yesterday's high for the week.

Earlier on Friday, the Bank of Japan announced a further ¥5 trillion ($62 billion) in quantitative easing on Friday, while also leaving interest rates on hold at 0.1%.

Over in China, the Shanghai Futures Exchange said Friday it is cutting its commission on various gold futures contracts in an effort to support liquidity. Commissions on gold trading will fall from 30 Yuan per lot to 20 Yuan per lot.

Ben Traynor
BullionVault

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it

Depending on how you look at it, the Bank of England's doing its job brilliantly...

PRELIMINARY data released this week show that Britain has fallen back into recession. UK GDP shrank for the second consecutive quarter in the first three months of the year, meaning Britain's first "double-dip" recession since that 1970s.

In truth, this was not unexpected. Nor was this week's other news that UK government debt continued to rise in the year to March, hitting 66% of GDP according to the Office for National Statistics.

Nonetheless, with debt growing and the country seemingly as far away from a meaningful recovery as ever, it seems an appropriate time to consider the likely environment British investors will face over the next few years – and what it all might mean for anyone who has made a gold investment.

We have noted before that there are five ways a government can deal with its debt:

1. Economic growth – The only meaningful claim a sovereign has on being able to repay is its power to tax. This claim becomes wobbly when the economy from which tax revenues are generated stagnates;
2. Raise taxes – Aside from this being counter-productive, slow or negative growth makes raising taxes very difficult politically;
3. Borrow more – Repay and service existing debts by taking on more debt. In practice, there tends to be a limit to how much investors are willing to lend countries. And, as we'll see in a moment, that limit can be hit suddenly and with little warning;
4. Inflate – Repay, but in money that's worth less than when you borrowed it. Generally this option only applies to debts denominated in domestic currency and where a country has control of its own monetary policy;
5. Default – Just don't pay.

Traditionally, a government like Britain's has managed its debt through a combination of the first four measures. Bondholders would prefer the government to use only the first two. The third is less-than-ideal since it can lower the value of bonds already in circulation. The fourth and fifth clearly impose real terms cost son lenders.

When an economy hits bad times – as Britain's has – the balance shifts and borrowing and inflation do more of the work, simply because the first two measures are not feasible. This is the environment British investors can expect in the years ahead. It's the one we have now, in fact, just dragging on and getting incrementally more intense.

But what's the endgame? Where and how will this crisis end?

The short answer is it will most likely end the way all such crises end: with the creditors paying the bill.

How exactly will this happen? To be blunt, we don't know. No one does. But we can hazard a guess.

Policymakers will try to steer a nervy course between two rather unpleasant possibilities: a debt crisis, such as that engulfing Europe right now, and out-of-control inflation.

Here's a closer look at how those scenarios might come about.

A Greek-style debt crisis?

Five years ago, Greek government bonds were treated as risk free assets. In May 2007, Greek 10-Year bonds yielded around 4.5%. German 10-Year bonds meantime were trading at yields of around 4.3% that same month.

Granted, this is a snapshot of one brief period, but it illustrates a point: Greek bond yields were not pricing in any of what was about to happen.

That changed, and it changed very quickly. This is what tends to happen in a debt crisis – there is a sudden reappraisal of a borrower's creditworthiness. The amount lenders are willing to lend goes down, while the rates a borrower needs to pay goes up. Suddenly, it becomes harder to roll over debt, and harder to borrower on sustainable terms.

The factors that can prompt this "sudden reappraisal" include:

• A growth shock, since it makes debt repayment and servicing harder;
• A sudden rise in levels of debt, since it too makes repayment harder and default more likely;
• A general rise in investor risk aversion, since they are likely to favor safer assets and prioritize getting their capital back over how much it might grow.

Greece, as is often the case, was hit by all three at once.

Britain, with a much longer debt maturity profile than Greece, remains a long way from that scenario. Or so we would like to think. In truth, though, sluggish growth and rising sovereign debt levels are moving us closer than we would like.

So far, though, UK gilts have continued to be regarded more-or-less as a safe haven, with yields hitting record lows this year (we will leave for another day the reasons why this might be, and how justified and sustainable is this phenomenon).

Britain has a key advantage over the likes of Greece (and Ireland... Portugal... Italy...Spain... The Netherlands... France... etc.). An ace up the sleeve: monetary sovereignty.

But is this a game where aces are high or low? That depends on whether we end up with the second nightmare scenario.

Britain "wins" the currency war

The first two measures for repaying debt (growth and higher taxes) look to be a busted flush for the foreseeable future. While gilts continue to be regarded as a risk-free asset, the third measure (more borrowing) remains viable. But if Britain pushes its luck, it could find one day that investors take a look at its debt levels, compare them to its growth rate, and all decide they want to be first to the exit.

It therefore seems reasonable to expect that measure four (inflation) will take up a greater-and-greater share of the debt "repayment" work – especially if the British government gets serious about reducing borrowing levels (a sizeable 'if', admittedly).

The Bank of England has so far done a reasonably good job at achieving its main goal since the crisis began. Yes, you read that correctly. The bank's primary goal, you see, is no longer price stability – at least not in this observer's view. It is to prevent a banking crisis by ensuring banks have access to enough liquidity to keep things ticking over. The most obvious first step was to cut interest rates to historic lows, which the Bank did.

But it went a lot further. To see what I mean, take a look at the following extract from one of the Bank's numerous papers on the impacts of quantitative easing (I'm quoting quite a big chunk to give you a feel for all the different liquidity measures the Bank has introduced:

"Large-scale asset purchases in the United Kingdom were a culmination of a package of measures designed to address the consequences of the financial crisis. These measures included the provision of enhanced liquidity support, measures to enhance market functioning and QE or large-scale asset purchases...The provision of liquidity support was centred on the £185 billion Special Liquidity Scheme introduced in April 2008, which allowed banks to swap mortgage-backed securities and other illiquid assets for Treasury bills. A Discount Window Facility was also introduced to meet the short-term liquidity needs of financial institutions requiring assistance. In addition, there was the assurance that the Bank of England was ready to offer emergency liquidity support at a penalty rate and against a broader range of collateral to otherwise solvent financial institutions that were experiencing liquidity problems."

The above was all pre-QE. That was still to come:

"To address market functioning, an Asset Purchase Facility was created to allow the Bank of England to purchase high-quality commercial paper and sterling investment-grade corporate bonds. Before the QE policy was introduced, these purchases were financed by the issuance of Treasury bills and the cash management operations of the Debt Management Office. Like the offer of emergency liquidity support, the knowledge that the central bank was now in the market for these assets may have improved overall market functioning."

It is perfectly understandable that the Bank should seek to forestall a banking crisis by ensuring the system has sufficient liquidity. But these measures are not cost-free.

On the eve of the crisis, the Pound was trading at around $2. It has fallen sharply since. Admittedly that is a rather artificial comparison; $2 is right at the top end of the range over the last 25 years, and most currencies have suffered against the Dollar since the crisis started, as many investors have viewed the Dollar as a safe haven.

But consider the Pound against the Euro. When the crisis began in mid-2007, the Pound was trading just below €1.50. It then fell to nearly €1.00 in early 2009, and has never been higher than €1.25 since – despite everything that's happened in Europe. Why?

One reason could be that the Bank of England has been more successful that the European Central Bank at signaling its willingness to issue liquidity in the event of a crisis. Depending on your point of view, you might say this shows the bank has done a better job of performing its lender of last resort role. Or you might say it's done a better job of debasing the currency.

In a lot of ways, they are the same thing.

The implications for gold

One way of looking at gold's long run price behavior is to view it not as a commodity, but as a currency. Gold's bull market over the last decade or so can thus be viewed as one currency (gold) gaining value against its central bank-issued counterparts.

As we have noted before, gold's day-to-day moves – against all currencies – tend to be determined by what is happening with the Dollar. But over a longer period, it makes a significant difference against which currency you measure gold.

From mid-2007 to last September's peak, Dollar gold prices gained around 180%. Sterling gold prices, however, rose around 260%.

With Britain mired back in recession, prospects are slim that the Bank of England will consider a move away from its current accommodative stance any time soon. That will weigh on Sterling.

British investors who made a gold investment early in this crisis have seen their decision to ensure themselves pay off. As the crisis drags on, though, the need for a hedge has not gone away.

Ben Traynor
BullionVault

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it

Yesterday’s decision by a majority of the Dutch parliament to come to an agreement on a budget for 2013 that meets EU budget conditions it would appear had removed a near term pressure point in the Eurozone debt crisis, even though the political uncertainty of the setting of a date for the election still needs to be agreed upon. This relief proved to be short-lived, due to events later in the evening, elsewhere with respect to Europe, and another sovereign downgrade.
 
It was always going to be too good to last and so it was proved as after weeks of silence from the ratings agencies Standard & Poors broke cover and downgraded Spain’s credit rating two notches to BBB+ with a negative outlook, citing significant risk to economic growth and budgetary performance with the likelihood that the Spanish government will need to provide further support to the banking sector.
 
While not entirely unexpected this move by S&P is sure to underpin Spanish 10 year bond yields once more which had already started to edge back above the 5.8% level yesterday. The problems facing Spain are expected to be highlighted further later this morning with the latest unemployment data expected to show an increase to 23.8%.from 22.85%.
 
The timing of the downgrade is not great for Italy either, given that they are looking to get away about €6.25bn of 5 and 10 year BTP’s this morning, and their bond yields had begun to edge lower in the past three days.
 
It wasn’t too much of a surprise to see the Bank of Japan expand its asset purchase scheme by 10trn yen to 40trn yen this morning; however the decision to reduce its credit lending program by 5trn yen could well negate some of the effect of the increase in the asset purchase scheme. The yen is broadly unchanged after some disappointing industrial production data while inflation remains well short of the 1% target, suggesting further easing in the coming months will be quite likely.
 
In the UK the pound appears to have shrugged off the disappointment of this weeks Q1 GDP numbers with markets preferring to focus on the more positive data seen throughout the first quarter, hitting two year highs against a basket of currencies. This weeks improvement in Nationwide consumer confidence also suggests that things may not be as bad as the ONS numbers suggest however Gfk consumer confidence for April has muddied the waters in this respect somewhat by not following in the footsteps of the Nationwide numbers earlier this week. The Gfk numbers have actually got worse dropping from -30 to -31 suggesting a rather confused picture for the UK economy.
 
After the events of the FOMC meeting earlier this week and the rising levels in weekly jobless claims yesterday which provoked some disappointment, attention now turns to the U.S. economy and the level of Q1 GDP growth there. Expectations are for a slight reduction from the Q4 figure of 3% to 2.5%, though if it comes in above that markets are likely to be fairly happy, and the speculation about further QE is likely to recede once more, at least until the next bit of bad data. Irrespective of the number any further QE if it were to happen, wouldn’t happen before June, given that is when the next Fed meeting is due to take place.
 
EURUSD – the range trading within the triangular consolidation continues as the single currency edges beyond the 55 day MA towards the trend line resistance at 1.3300 from the March highs. While there is lower line support on the triangle at 1.3040, there is also trend line support from the 1.3000 April lows at 1.3165. The break of the larger triangle remains the primary pattern and could well signal a 500 point move. To open up the lows this year at 1.2630 we need to see a concerted break below 1.2975. Only above 1.3400 targets the 200 day MA at 1.3495.
 
GBPUSD – the pound continues to edge higher dragging itself above the 1.6170/80 resistance level and keeping the prospect of further gains towards 1.6400, to make it 9 successive up days in a row. There is some resistance around the 1.6250/60 area, but momentum is now starting to look a touch overbought. Only a move below 1.6050 retargets the long term trend line support at 1.5900 from the January lows at 1.5235 which continues to act as support on the downside.
 
EURGBP – while below the resistance at the 0.8220 area the onus remains towards the downside and a move towards the 2010 lows at 0.8065 as the next target. Only above 0.8220 would retarget the larger resistance at 0.8280 as well as trend line resistance at 0.8300 from the February highs at 0.8505.
 
USDJPY – yesterday’s dip to the 80.65 cloud support keeps the upside momentum intact. This is where the weekly cloud support now lies and we need to close the week above this level for the upward momentum to remain intact. The yen continues to find support just above the 80.70 level which keeps the upward momentum. A weekly close below 80.70 argues for further losses towards 79.20. The U.S. dollar does need to break back beyond the two weeks highs at 81.85/90 to retarget 83.30.

U.S. markets have been bouncing back and forth through the morning with bulls and bears battling for domination. For the moment, the bulls appear to have gained the upper hand supported by generally positive earnings reports and better than expected pending home sales (4.1% over month vs street 0.8%). This was partially offset earlier on by jobless claims of 388K which were worse than the 375K street estimate and stubbornly refuse to come back down after a recent pop up from the 350K area.

Nuance Communications (NUAN) has rallied 9.5% on the back of a positive earnings pre-announcement while Citrix Systems (CTXS) up 8.4% and homebuilder PulteGroup (PHM) has gained 7.1% off of earnings reports. Tax preparer H&R Block (HRB) has tumbled 12.7% after announcing a major restructuring. In Canada today, some shares have been falling after earnings failed to meet expectations including Goldcorp (G CA) down 5.2% and Potash (POT CA) down 2.7%.

European markets have been rather mixed today having had to digest a plethora of company updates today, though by and large these updates have been fairly positive. Indices have strengthened heading into the close boosted by the improved sentiment in the U.S. The FTSE and DAX have moved into positive territory while the MIB has shaved much of its losses. The IBEX continues to struggle, flirting with the 7,000 level.

The oil and gas sector has been among the leaders after Royal Dutch Shell (RDSA) reported better than expected increase in Q1 earnings, as the company benefitted from higher oil prices. Other outperformers include Costa Coffee owner Whitbread (WTB), also in demand with growth at the coffee chain driving profits and sales for the full year. Consumer goods firm Unilever (ULVR) has also added to the positivity with an increase in turnover and reporting that it was on track to hit its full year targets.

The biggest declining sector is healthcare led by pharmaceuticals giant AstraZeneca (AZN) on the back of the resignation of its CEO as well as a drop in profits in Q1 of 38% to £1.3bn, while also warning that profits will be lower for the fiscal year. Profits at Barclays (BARC) rose to £2.45bn for Q1, though after one-off items this has translated into a loss of £475m.

Currency markets have been relatively quiet today for the most part. JPY has been rallying ahead of this evening’s data and Bank of Japan meeting. Gold and silver have also been gaining with USD sinking. EUR and GBP continue to be well supported while resource currencies have picked up a bit along with commodity prices.

Commodities have been picking up a bit today particularly copper, and crude oil, suggesting that some of the fears surrounding the global economy have eased a bit. Natural gas has rallied on what appears to be short covering after this week’s storage report met expectations.

Tonight brings a flurry of announcements out of Japan with consumer prices and unemployment due at 11:30 pm BST followed by retail sales and industrial production at 11:50 pm. Housing starts and construction data follows at 5:00 am. The Bank of Japan’s latest interest rate decision is due at 4:30 am BST where the street will be looking to see if more QE is forthcoming which could impact trading in JPY.

The big news tomorrow is the first kick at Q1 GDP for the U.S. The street is expecting 2.3% growth over year although there’s a risk of a disappointment in the wake of the UK news and mixed US March economic numbers.

Spot market prices for gold bullion traded steady Thursday morning, around $1650 an ounce during London's morning session – slightly higher than where they started the week.

"[Gold] trend line support is seen at $1627 on the weekly chart," says the latest technical analysis from Scotia Mocatta.

"A close below this level on Friday will bring in liquidation selling of stale long gold positions."

Gold prices briefly touched $1627 per ounce on Wednesday following the latest Federal Reserve interest rate decision, before rallying to touch a one-week high at $1653 this morning.

The gold price in Sterling meantime briefly hit a four-month low at £1008 per ounce following Wednesday's Fed decision, before it too bounced back higher.

Silver bullion meantime failed to break above $31 per ounce – remaining around 3% down on the week so far – while stocks and commodities were also broadly flat as markets digested the latest statements from US policymakers.

In its official statement yesterday, the Federal Open Market Committee reiterated its view that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014".

The Fed however published projections showing that only four FOMC participants expect that the appropriate rate at the end of that year will still be 0.25% or below, compared to six when projections were last published back in January.

By contrast, ten of the seventeen participants expect the appropriate rate at the end of 2014 will be 1% or above – up from eight in January.

"The Fed's interest rate forecasts," writes Robin Harding at the Financial Times, "are getting the bank into a real bind."

Harding points out that Bernanke defined "exceptionally low" rates as "close to where we are now", meaning the FOMC statement is at odds with participants' projections.

"The result is a complete mess," writes Harding.

"This confusion undermines the cause of greater transparency that Mr. Bernanke has worked so hard to advance."

"Strains in global financial markets," adds yesterday's FOMC statement, "continue to pose significant downside risks to the economic outlook."

This was identical to the phrase used in March's statement, with the exception that this time the FOMC did not say these strains have eased.

The US economy meantime needs to add between 150,000 and 200,000 jobs each month to meet fed forecasts, Fed chairman Ben Bernanke told a press conference following the interest rate announcement.

America's economy is facing a "fiscal cliff" at the end of this year, US Treasury secretary Timothy Geithner warned Wednesday.

"The simultaneous expiration of tax cuts and large across-the-board cuts in spending... presents a risk," Geithner said.

"If you try to restore fiscal balance without a penny of additional revenue, then you have to cut deeply – too deeply – into critical functions of government."

"If Congress can't respond to the prospect of much tighter fiscal policy," says Steve Barrow, currency analyst at Standard bank in London, "then it may be up to the Fed again to cushion the economy through easy monetary policy."

Here in Europe, "the soundness of banks' balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalization of their funding channels," European Central Bank president Mario Draghi told the European Parliament Wednesday.

"I consider it of crucial importance that banks strengthen their resilience further, including by retaining earnings and by retaining bonus payments."

European banks borrowed over €1 trillion at the ECB's two longer term refinancing operations in December and February, with Draghi saying it is "encouraging" that much of this money was borrowed by small banks as these "are best placed to refinance the real economy".

In the UK, British bank Barclays on Thursday reported a 22% rise in first quarter pretax profits compared to Q1 2011.

Over in India meantime, early reports suggest there was a significant drop in gold buying for this year's Akshaya Tritiya festival, which fell on Tuesday this week, compared to last year.

Gold bullion sales are estimated to have dropped by around 50% to 10 tonnes, newswire Reuters reports.

Ben Traynor
BullionVault

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it

Positive company updates in the past 24 hours have helped put concerns about Europe to one side in the short term, while last night’s FOMC statement painted a slightly more positive outlook for the U.S. economy. Earnings are likely to remain in focus again today in the absence of significant economic data.

The Fed upgraded its forecasts for economic growth, and revised downward their unemployment projections. The committee was slightly more hawkish with respect to the timing of further tightening with more members coming to a consensus of 2014 as the earliest date for such measures.

Concerns about inflationary pressures did prompt a slight change in tone from the Fed with respect to rising prices thus making the prospects for further QE much less likely, which could give the U.S. dollar a boost in the near term.

Today’s release of the latest weekly jobless claims numbers are expected to show a small decline from last week’s surprise rise to 386k, dropping back to 375k.
 
Despite the more upbeat tone from the Fed, Europe remains a concern and this is set to be borne out today in Holland as the Dutch parliament meets today in an attempt to try and agree some form of a consensus and pass a budget in time for the EU deadline on the 30th April.

With political divisions opening up across Europe pressure is building on Germany and the ECB to do more and rein back on the current austerity based approach. While this does appear to have prompted a slight shift in tone from Germany’s Angela Merkel, she pointedly ruled out any form of stimulus spending to boost economic growth, due to concerns about inflationary pressures.

Today’s release of German CPI for April is expected to show inflation above target at 2.2%.
 
Yesterday’s surprise news that the UK economy contracted by 0.2% in Q1 appears to have been shrugged off  by investors as a statistical quirk which will get ironed out in the coming weeks, judging by how the news was received across the markets yesterday. The pound initially dropped back but soon recovered its poise.

In data released overnight the latest Nationwide consumer confidence numbers for March showed that confidence levels rose to a nine month high from February’s 44 reading, coming in at 53, and reinforcing the sharp rise in UK retail sales seen last week.
 
CBI retail sales for April are expected to show a slight decline from March’s flat reading, dropping to -4, though given increased consumer confidence there could be an upside surprise.
 
EURUSD – the range trading within the triangular consolidation continues as the single currency edges beyond the 55 day MA towards the trend line resistance at 1.3300 from the March highs. While there is lower line support on the triangle at 1.3040, there is also trend line support from the 1.3000 April lows at 1.3160. The break of the larger triangle remains the primary pattern and could well signal a 500 point move. To open up the lows this year at 1.2630 we need to see a concerted break below 1.2975. Only above 1.3400 targets the 200 day MA at 1.3495.
 
GBPUSD – despite a short lived dip to 1.6080 yesterday the cable continues to struggle around the 1.6170/80 resistance level and this remains the main obstacle to a move towards 1.6400. A failure to break above this resistance could provoke a deeper sell-off and delay any move towards 1.6400. Only a move below 1.6050 retargets the long term trend line support at 1.5900 from the January lows at 1.5235 which continues to act as support on the downside.
 
EURGBP – as suspected the 0.8220 area capped yesterday’s rally in the single currency and as such keeps the onus on the downside and a move towards the 2010 lows at 0.8065 as the next target. Only above 0.8220 would retarget the larger resistance at 0.8280 as well as trend line resistance at 0.8300 from the February highs at 0.8505.
 
USDJPY – upside momentum remains intact after last weeks close above the cloud support now at the 80.70 level. The yen continues to find support just above the 80.70 level which keeps the upward momentum intact and while above this level on a weekly closing basis the outlook remains constructive for the US dollar despite the low last week around the 80.30 level. A weekly close below 80.70 argues for further losses towards 79.20. The U.S. dollar does need to break back beyond the two weeks highs at 81.85/90 to retarget 83.30.