Gold News

Gold Drops 3% as Crude Oil Falls, But "Risk Aversion Prevails"; "Safe Haven Status" Draws New Investment

Gold sank to a two-week low in New York early Tuesday, losing almost 3% from an earlier high as crude oil fell and Western stock markets rallied alongside the US Dollar.

The German Dax turned a 1.5% drop into a slight gain by the finish in Frankfurt. Here in London, the FTSE100 reversed two-thirds of a 2% loss.

"Risk aversion still prevails," says the latest Gold Market analysis from Mitsui, the precious metals dealer. "[But] severe profit-taking in conjunction with any swift change in financial market sentiment is always a possibility.

"For now the financial environment remains in very uncertain waters and gold should benefit appropriately."

The Dollar meantime pushed the Euro almost one cent lower today from a one-week high, despite a sharply negative reading in the Philadelphia Fed's monthly manufacturing index.

Versus the Japanese Yen, the Dollar jumped 1.1% higher to trade at ¥107.19.

Today in Tokyo, Japanese gold futures ended the session at a fresh 25-year high above ¥3,360 per gram.

"Gold is still reacting to ongoing concern over the economic outlook," says Daniel Smith at Standard Chartered here in London.

"People continue to be in gold for its Safe Haven Status."

Tuesday's sharp drop in Gold Prices came "on the back of crude liquidation" believes Narayan Gopalakrishnan, a trader at MKS Finance in Geneva, Switzerland, speaking to Bloomberg News.

Oil prices fell $4 to $127 per barrel – down 13% from last week's record high – as Tropical Storm Dolly moved away from key oil & gas installations in the Gulf of Mexico.

"This is more of the long exit from the market by the hedge funds," reckons Jim Ritterbusch at Ritterbusch & Associates, the US oil consultancy.

"A lot of these investors who have been supporting prices are hitting the road"

US stocks bounced hard from an opening loss, despite poor earnings reported by American Express and Wachovia overnight, with warnings of sharp price discounts to come from Apple Inc.

Today in Washington, Peter R. Orszag – head of the Congressional Budget Office – said a government bail-out of ailing mortgage insurers Fannie Mae and Freddie Mac could cost tax-payers some $25 billion.

Their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) said this morning that US home prices fell at the fastest pace on record in May, dropping almost 5% from the same month in 2007.

"In my view this is going to be worse than the early '90s savings & loan crisis," believes Nouriel Roubini, professor of economics at New York University. He said today that the global financial system faces its "worst crisis since the Great Depression" with the Bear Market in Stocks only half-way through.

"This time around we're not only going to have hundreds of smaller community banks exposed to real estate going belly-up – and the average smaller US bank holds 67% of its assets in real estate...But in addition to this you have the regional banks, about 30 of them, a good third, will go bust.

"IndyMac was the first. Even among some of the big major national banks, their business model is no longer viable as independent entities."

Looking at the latest data on Gold Investment flows, "there was a downward correction in the price during April but this proved short-lived," says Natalie Dempster, research manager at the World Gold Council (WGC).

The WGC today reported a net inflow equal to five tonnes of gold into the world's major Exchange-Trade Gold Funds for the second quarter. That took the total volume of gold – held in trust to "back" the value of Gold ETF shares – up to 948 tonnes.

"The combination of Rising Inflation and price expectations, a weakened Dollar and increased concerns about systemic risk in the financial sector have all pushed gold higher again," notes Dempster.

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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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