Market Commentary
Key Notes: France and Germany unveiled plans for closer Eurozone integration yesterday. They proposed a tax on financial transactions and closer joint governance of economic policy to stop the debt crisis in Europe. However, they stopped short of increasing the euro zone bailout fund or selling euro zone bonds. This triggered further concern in financial markets that European policymakers are shying away from tough politically unpopular measures that are needed to contain the debt crisis. Equities and the euro dipped and a flight to safety boosted gold prices.
With the Eurozone debt crisis lingering in the backdrop, periods of risk aversion is likely as governments struggle to make difficult decisions. Gold could be a key beneficiary and the long term uptrend of gold remains intact. While we do not discount periods of corrective action, gold could head above $2000 an ounce within 12 months. The current environment of low interest rates is also favourable for gold at a time when central banks are still contemplating another round of stimulus plans if economic growth stalls.
Market Summary
Precious Metals: Spot gold climbed higher on Tuesday as the meeting between France and Germany about closer euro zone integration and deficit limits failed to ease investors concerns about the debt crisis. Gold also benefited from a flight to safety as equities traded lower on disappointing GDP data from Eurozone and Germany. Notably, Germany's gross domestic product expanded just 0.1% from April to June versus the previous quarter.
Base Metals: Copper dipped to the lowest level in a week as weak growth in Germany increased worries about the faltering global recovery. Despite betterthan- forecast U.S. July industrial output data and a smaller-than-expected decline in home building last month, investors remained nervous. Price sensitive buyers of copper stayed away, waiting for prices to stabilize. Copper inventories rose 4,675 tonnes to 465,275 tonnes, with the majority of the metal inflow occurring at LME warehouses in Rotterdam.
Crude Oil: U.S. crude oil ended down more than 1% the French-German proposals for the euro zone debt crisis failed to alleviate worries about Eurozone debt contagion. However, bulls may be heartened that crude ended well above session lows as Fitch Ratings affirmed the United States' top-notch credit rating at AAA and said the outlook for the rating was stable. U.S. crude pared losses in post settlement trade after industry data showed gasoline stocks fell a more than expected 5.4 million barrels in the week to 12 Aug.
Currencies: The Swiss franc slid against the dollar and the euro on speculation the Swiss National Bank may take drastic measures to curb gains in the currency. The new measures could come as soon as Wednesday when the government meets to discuss the franc. The Swiss newspaper SonntagsZeitung reported that the Swiss National Bank is poised to set a lower limit for the euro-franc exchange rate and will use all means to defend this. The newspaper said insiders expect the SNB to formulate a concrete exchange rate target and intervene in FX markets if needed.
