Gold News

Gold pulls back as the Fed shores up confidence in US economy

Gold fell back as the US headed for lunchtime today, dropping from the European high of $677.50 to just $667 as London closed for the day.

The sharp sell-off in global stocks continued, meantime. Wall Street opened higher after Tuesday's 3.3% drop, but the European markets ended 1.8% lower in London and 1.4% across the Eurozone, erasing 2007's gains to date.

In Tokyo the Nikkei has already closed 2.9% lower today. And taking profits in gold to cover losses elsewhere looks like the fall guy for Tuesday's huge 4% drop in gold – followed today by a return to the low $660s.

"If you are long in gold and hold shares as collateral to cover margin requirements, then you have to sell when the stock markets fall," said a dealer in Singapore to Reuters earlier.

"This is also related to long positions in New York. That's what we call a chain effect. But bargain hunters are coming in because the price is cheap and good."

"This never was a gold-market specific problem," said John Reade, an analyst at UBS in London to Bloomberg. "[Gold] was reacting to other stuff.

"If the Chinese market was responsible for the sell-off yesterday, we should be okay." But the speculative long position in gold built up by short-term traders so far this year could make further falls likely.

"Everybody who wanted to sell gold probably didn't get out in a day," says Reade. "The position is so large."

Economic news from the US today is also encouraging short-term gold traders towards the exit door.

The US economy grew by only 2.2% at the end of 2006, Washington said today, below government forecasts. Sales of new home fell 16.6% last month, the fastest collapse in 13 years.

That suggests lower inflation ahead, something that many investors wrongly assume would be bad for gold prices. Federal Reserve chairman Ben Bernanke has done his best to shore up confidence in the US economy too, saying that the failure of 22 subprime lending companies so far has been "contained".

There's nothing to fear from the sharp fall in global asset prices either, says the Federal Reserve's New York president, Timothy Geithner.

He reckons that the US economy shows "remarkable resilience" amid this week's sudden collapse in stock prices.

But what might yesterday's drop really mean for investors – including those "ghouls" who buy gold – click here and read on now...

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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