Gold News

Gold Bounces as Western Stocks Fall on "Horrific" Data; Volatility and Risk-Aversion Set to Surge Once Again, Says UBS

Gold Prices fell to a three-session low early Tuesday, finally bouncing higher from $876
per ounce as European equities slipped alongside crude oil prices and
government bonds.

Only base metals bucked the trend as the Dollar ticked
higher on the currency markets.

By midday in London, spot Gold for immediate delivery of physical
metal stood almost 1% below Tuesday's US close.

"Signs that the US Dollar has bottomed have pressurized
Gold Prices in
recent weeks," says Natixis, the French investment bank, in its May
report.

Identifying a "selective bull market" in precious
metals, Natixis believes "the Investment
Case for Gold
will remain strong throughout the rest of this year and,
potentially, into 2009.

"However, this may not lead to new highs in the Gold Market," it
says, adding that "we may have already seen the peak for the year, when
prices briefly exceeded $1,000 per ounce."

For British investors looking to Buy Gold today the price bounced around
£450 per ounce after a double-whammy of rotten news for the UK economy.

Consumer price inflation rose to the Bank of England's
upper-limit of 3.0% annually in April, said the official data agency this
morning – "a pretty horrific headline number," as one analyst put it
to the BBC.

But retail sales meantime sank 1.5%, while house prices –
the key driver of Britain's credit & business cycle – fell across 82% of
the country according to the latest reports from professional surveyors.

"The real issue is the collapse in the number of housing
transactions," says Ian Perry, spokesman for the Royal Institution of
Chartered Surveyors (Rics).

"This has very real implications, not just for the
property industry but also the High Street and the wider economy."

In the United States – where Tuesday's session brings the
latest readings of import prices, retail sales and consumer confidence –
"the core price measures are rising somewhat faster than I would
prefer," said Sandra Pianalto, head of the Cleveland Federal Reserve Bank
in a speech today.

"Inflation presents a key risk to my outlook."

Yet somehow – and despite voting to slash US interest rates
some 2% below the current growth in US consumer prices – Pianalto also believes
that "the Federal Reserve's policy strategy remains compatible with a low
and stable inflation rate."

Last week average US gasoline prices reached a record $3.72
per gallon. Now the Petroleum Equipment Institute – based in Tulsa, Oklahoma –
says that 8,500 of the United States' 170,000 gas stations will need to fit new
pumps to display prices above $4.00 per gallon.

"Installed when gas was less than $1 a gallon, their
dials top out at $3.999," reports the Associated Press.

On Wall Street, a straw poll of big US investment managers
shows today that "two investors who run bond funds are worried about
higher inflation [but] two equity investors aren't as concerned," notes
Karen Dolan at MorningStar.com.

Contrasting recent comments from Bob Rodriguez of FPA Capital and Bill Gross of Pimco with analysis from Bill Miller (Legg Mason)
and Tom Marsico (Marsico Capital Management), Dolan concludes that "the
differences in opinion may be somewhat reflective of the different lenses with
which these managers view the world.

"Any threat of inflation is worrisome for bond
managers because it drives down the prices of the fixed-rate bonds they
own."

For equity fund managers, on the other hand, "we don't
like inflation – it's bad for our country and our civilization," as
Charlie Munger – right hand man to legendary value-investor Warren Buffett –
said at the Berkshire Hathaway annual meeting last week.

"[But] we will make more money when there is
inflation."

Inflation in raw energy costs took a breather on Tuesday,
pulling the price of crude oil lower for the second session running after the
International Energy Agency (IEA) cut its forecast for world oil usage in 2008
by 0.4%.

"The IEA's report again confirms the global extent of
this [economic] slowdown and may be bearish [for oil] in the short-term,"
reckons Christopher Bellew at Bache Commodities in London.

Looking at the Eurozone, "inflation will decelerate
further in coming months," says Natixis economist Sylvain Broyer,
"[and] activity will be less resilient in the second quarter of '08."

But that other key mover of the Gold Market since last
summer – the banking panic that sparked a Flight
into Physical Gold
by anxious investors and drove prices from $650 to
$1,032 per ounce – may make a sudden return in the next month, believes Meyrick
Chapman, an analyst at UBS.

Reviewing the key events of the global credit crisis to
date, Chapman notes the collapse of Northern Rock on Sept. 14, the joint
central-bank action of Dec. 12, and then the bail-out of Bear Stearns – the
fifth largest financial institution in the United States – on March 14.

All came within a week of quarterly settlement dates for
currency and interest-rate contracts traded at the International Monetary
Market (IMM), a major focus for interbank trading.

"We are expecting to see a gradual increase in risk
aversion coupled with wider spreads and rising volatility," says Chapman
in his new strategy report for UBS in London.

Citing June 18th as the next potential flash-point, "we
probably won't see the same disruption as we saw in March," the report
goes on, because of the central bank action seen in the meantime.

"But we will see some reversal" of the recent
easing in monetary pressures.

Any return of the banking panic witnessed in Sept., Dec. and
March may well spur a fresh Flight
into Physical Gold
by anxious investors.

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.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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