By Ben Traynor
WHOLESALE MARKET gold prices ticked lower Wednesday morning in London, dropping below $1580 an ounce, while stock markets and commodities were broadly flat and US Treasuries gained, as markets continued to digest yesterday's testimony to Congress by Federal Reserve chairman Ben Bernanke.
Like gold, silver prices also eased, falling as low as $27.04 an ounce in Wednesday morning's London trading.
A day earlier, gold prices fell 1% in an hour on Tuesday after Bernanke began his testimony. Although the Fed chairman said monetary policy is "still on a loosening cycle", there was no clear mention of a third round of asset purchases, known as quantitative easing.
"The bull camp in gold wanted to see more quantitative easing," says a note from CME Group.
"[But] seeing the US economy hold together might keep broad based risk-off deflationary selling interest from resurfacing in the near term."
"We suspect that the short-term outlook for the precious group will be somewhat lower from here," adds INTL FCStone analyst Ed Meir.
"While easing may be expected, investors are still saddled with the uncertainty of not knowing exactly when such an order will be given."
"Monetary policy is kind of at its end right now," Bernanke told US lawmakers yesterday.
"What will be needed to make it more effective is that fiscal issues need to be dealt with."
The Fed chairman said that the so-called "fiscal cliff" – the combination of tax hikes and spending cuts currently due to come into effect at the start of 2013 – risks "negative effects likely to result from public uncertainty about how these matters will be resolved".
"The recent downshift in economic data," says a note from Swiss refiner MKS, "may suggest that there will be steady pressure on the Fed to provide additional monetary accommodation."
Bernanke also said that in 2008 the New York Fed "informed all the relevant authorities" in the US and UK about suspicions it had that the interbank interest rate Libor was being manipulated. Bank of England governor Mervyn King however told UK lawmakers Tuesday that he first heard about alleged wrongdoing two weeks ago.
Bernanke is due to give further testimony to Congress today when he appears before the House Financial Services Committee. This will be the last chance Ron Paul has to quiz the Fed chairman, with the Texas Congressman due to retire from Congress in December.
Here in London, the Bank of England's Monetary Policy Committee voted seven-to-two in favor of the decision to increase quantitative easing by £50 billion to £375 billion, minutes from this month's MPC meeting published Wednesday show.
The minutes also show the MPC discussed cutting the Bank's main policy interest rate below its historic low of 0.5%, where it has been since March 2009. MPC members, the minutes say, will review this idea once the impact of the new Funding for Lending scheme – valued at around £80 billion – has had time to be assessed.
UK unemployment meantime fell to a nine month low of 8.1% in the three months to May, according to the International Labour Organization figure published Wednesday.
"Unemployment has been limited in recent months by an increase in people working part-time, more people becoming self-employed and restrained earnings growth," says Howard Archer, economist at consultancy IHS Global Insight.
"The big question is can the labor market remain resilient given the economy's ongoing weakness."
Over in China, the Shanghai Gold Exchange has drawn up a draft proposal that would see precious metals trading expanded to include the country's interbank market, Dow Jones Newswires reports.
The move would enable banks to trade gold and silver contracts over-the-counter through market makers rather than through exchange pricing on the SGE.
"A market-maker system and more new products in gold will help increase liquidity, which is badly needed in China's gold market these days," says an unnamed head of precious metals trading quoted by Dow Jones.
China has overtaken India in recent months as the world's largest source of gold bullion demand.
In the UK, CME Group has said it plans to offer a clearing service for OTC silver bullion forward contracts traded in London.
The gold mining industry meantime is failing to make sufficient new discoveries of gold to keep pace with production, consultancy Metal Economics Group reports.
"The amount of gold available for production in the near term is likely far less than has been found [in recent years]," says MEG, citing factors such as political instability, declining ore grades and rising costs.
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
(c) BullionVault 2011
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