SPOT MARKET gold bullion hit a five-week high at $1625 an ounce during Friday morning's London trading, on course for a weekly gain that would see the pattern of alternating up and down weeks stretched to week number eleven.

Silver bullion also held onto most of its recent gains, trading around $27.70 per ounce for much of the morning.

A day earlier, gold and silver rallied following comments from European Central Bank president Mario Draghi that were taken to suggest the ECB could start buying government bonds again.

"We believe the risk [for gold] now lies with a move to $1640, the June high," says the latest technical analysis note from bullion bank Scotia Mocatta.

""There will be buyers now on any retracement to "1590."

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"Technically the price action is starting to look a bit more constructive," agrees Credit Suisse analyst Tom Kendall.

"But that could fade as quickly as it appears to have been building... physical demand is still pretty soft [and] positioning is disinterested across much of the investment community.

Based on London Fix prices, gold bullion looked set for its biggest weekly gain in seven weeks by Friday lunchtime in London. A PM gold fix of $1626.75 or higher would make this the biggest weekly gain since the last full week in January.

With markets looking ahead to preliminary US GDP figures due to be published later, European stocks were broadly flat this morning, having rallied on Thursday after Draghi said the ECB "is ready to whatever it takes to preserve the Euro".

"It is a signal that the ECB is closer to reactivating bond purchases if all else fails," says Julian Callow, head of international economics at Barclays.

The ECB's Securities Markets Programme, which was launched in 2010, was used last year to buy Spanish and Italian government bonds on the open market.

"The thing we wonder here is exactly where the Bundesbank stands...[since it has] historically been resisting the reactivation of the SMP."

"The Bundesbank has not changed its opinion [on ECB bond purchases]," a spokesman for the German central bank told Dow Jones Newswires on Friday.

"[Draghi has] maneuvered himself into an extremely difficult situation," warns Carsten Brzeski, senior economist at ING Group.

"[Market] expectations are very high."

"I don't believe you will see government bond purchases yet," adds Jacques Cailloux, chief European economist at Nomura in London.

"We have some doubts about whether the interventions will be of the required scale," says Nick Kounis, head of macro research at ABN Amro in Amsterdam.

"It therefore seems likely that the bond purchases will just allow policy makers to muddle through unless much more financial firepower is put on the table."

Following Draghi's comments, benchmark yields on 10-Year Spanish government bonds fell back below 7%, while yields on Italian 10-year bonds fell below 6%.

"Draghi ist ein Plünderer des Bürger-Spargroschens", says a headline from German newspaper Handelsblatt. The phrase, which loosely translates as "Draghi is plundering the nest eggs of citizens", is attributed to German politician Frank Schaeffler, a member of the FDP party which forms part of the governing coalition.

"Higher inflation is an inevitable consequence of this ECB policy," adds Klaus-Peter Willsch, a member of chancellor Angela Merkel's CDU party.

"The signs are already clear to see: in prime real estate prices, prices of agricultural and forest land, gold, coin collections, classic cars...the flight into real values has already begun."

In the US, the first estimate of second quarter gross domestic product is due out later today, expected to show a slowdown in economic growth.

"If the US GDP number falls short of expectations, it would once again fuel speculations on Fed easing, which would help gold," reckons Phillip Futures analyst Lynette Tan in Singapore.

Elsewhere in the US, hedge fund Paulson & Co. may have lost closet to $50 million on its investment in gold mining firm NovaGold after its stock saw its biggest fall in three years, newswire Bloomberg reports.

Paulson & Co. offers investors accounts denominated in gold and holds a large number of shares in the SPDR Gold Trust (GLD), the world's biggest gold ETF.

GLD gold bullion holdings held steady yesterday at 1252.5 tonnes, though they remain at their lowest level since January.

Ben Traynor
BullionVault

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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.

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London Gold Market Report
from Ben Traynor
BullionVault
Friday 27 July 2012, 07:00 EDT

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