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Dutch Debt ‘On Edge of Downgrade’ — European Market Update

Concerns in the eurozone now focused on Netherlands


SPOT MARKET gold prices climbed to $1643 an ounce Tuesday in London – a 1.2% gain from yesterday’s low, but still below Friday’s close – as eurozone concerns focused on the Netherlands after yesterday’s government collapse.

Based on the PM London gold fix, gold prices remain 3% below their 200-day moving average.

Silver prices rallied back above $31 an ounce — though they remained around 2% off where they began the week – while European stock markets edged higher following Monday’s steep drop and commodities also made gains this morning.

The Euro meantime regained a bit of ground against the Dollar, though remained below last week’s close, with the Federal Open Market Committee due to announce its latest monetary policy decisions tomorrow.

“If the Fed fails to hint at more quantitative easing, we may see a sharp drop in gold prices,” says Hou Xinqiang, analyst at Jinrui Futures in Shenzhen, China.

“With the Dollar being slightly stronger, there is no reason at the moment to be interested in gold,” adds David Wilson, metals research and strategy director at Citigroup.

Since this time last year, the Dollar Index, which measures the strength of the Dollar against a basket of other currencies, has risen nearly 9%.

Over the same period, sales of investment gold coins by the US Mint have fallen more sharply than those for silver, the latest US Mint data shows.

The Netherlands successfully sold €1 billion of 2-Year government debt – as well as a further €0.995 billion in 25-Year government bonds – at auctions on Tuesday, following the collapse of its government a day earlier.

Average yields were little changed on previous similar auctions. The spread between benchmark 10-Year yields on Dutch and German government bonds however hit a three-year high Monday, as 10-Year bond yields fell to a record lows below 1.64%.

The collapse of the Dutch minority government, after it failed to get backing for its austerity plans, “is clearly credit-negative for the Dutch sovereign,” says Sarah Carlson, London-based senior analyst at ratings agency Moody’s.

“It generates both political and policy uncertainty.”

“The Dutch are on the edge of a negative rating action,” said Chris Pryce, director, Western Europe at fellow ratings agency Fitch last week, speaking to the Telegraph.

The newspaper reports that the Netherlands has half a million homeowners – nearly 3% of its population – in negative equity. Dutch central bank governor Klaas Knot has warned that borrowing costs will rise if the country loses its AAA status, as its debt is not regarded by investors as a safe haven in the same way as that of Germany and the US.

Ihe UK, public sector net borrowing was £15.9 billion last month – up from £15.1 billion in March 2011 – according to data published Tuesday by the Office for National Statistics.

Excluding the effects of financial interventions – the government’s preferred measure – net borrowing last month was £18.2 billion – compared to £18.0 billion a year earlier.

The March figures mean that borrowing as a percentage of GDP fell from 9.27% in the financial year 2010/11 to 8.30% in 2011/12. Preliminary first quarter GDP figures are due out Wednesday.

“They are making gradual progress in reducing the deficit,” says Royal Bank of Scotland economist Ross Walker.

“[But] it’s going to get more difficult in subsequent years…we haven’t really had any significant current expenditure cuts.”

Overall debt meantime rose from £905.3 billion (60.5% of GDP) to £1, 022.5 billion (66.0% of GDP) in the year to the end of March.

Gold prices in India rose to their highest level in two months, India’s Economic Times reports, hitting Rs 29,100 per 10 grams as many Indians celebrated the festival of Akshaya Tritiya, traditionally considered an auspicious day to buy gold.

Central banks worldwide added nearly 58 tonnes of gold bullion to their reserves last month, with Mexico and Russia each buying over 16 tonnes of gold.

This article was originally written by Adrian Ash

Article printed from InvestorPlace Media,

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