Precious metals ETFs surged last week after European policymakers made an apparent breakthrough on crisis measures. Gold rallied nearly 3% and silver surged over 4% on Friday after a breakthrough agreement between Eurozone leaders to allow the direct funding of banking sector bailouts and to remove European governments preferred status on repayment of Spanish bank debt.
Gold prices were lower Monday to trade under $1,600 an ounce. [Gold ETF Sees Quarterly Outflow]
Germany appears to be finally bowing to concerted pressure to ease the conditions under which help will be provided to troubled Eurozone nations and their ailing banking systems.
Eurozone leaders have agreed to allow the EFSF/ESM to directly recapitalize troubled banks once a single supervisory institution is formed. The seniority of Eurozone government claims on Spanish bank loans has also been relinquished, reducing private investors’ disincentives to buying Spanish government bonds.
However, few details on the timing and the mechanics for providing bank and sovereign debt funding were provided. Therefore, while the buoyant market mood may persist in the near-term, follow-through on implementation will be critical for positive momentum to be maintained.
Central bank buying
Gold buying by emerging market central banks remained strong in May. Russia led the way, with its central bank accumulating another 15.5 metric tons in May bringing its reserves past the 900 tonne level.
The central banks of Turkey, the Ukraine and Kasakhstan also purchased bullion, adding 5.7 tonnes, 2.1 tonnes and 1.8 tonnes respectively.
Central banks have been strong net buyers of gold over the past year, with their net purchases averaging up to 20% of total annual gold supply.
The week ahead
The key theme this week will likely be further easing by central banks, with the ECB expected to cut rates by at least 25 basis points at its Thursday meeting and the BOE expected to announce an increase to its asset purchasing program on the same day.
But perhaps the most important event during the week is the release of US nonfarm payrolls on Friday.
Ben Bernanke has indicated that average monthly increases of 150K are necessary for the Fed’s 8-8.2% unemployment target to be met.
After two consecutive months of sub-100K numbers, another weak number would increase the odds of another round of Quantitative Easing later this year. This would likely be bullish gold and other precious metals.
ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)
