Gold News

Gold Prices Jump with Oil, Stocks & the Euro as Investment Funds Pile into Commodities

Gold Prices rose 1.1% at the London opening on Tuesday, reaching a three-session high above $984 per ounce as crude oil surged to its fifth consecutive all-time record and Tokyo stocks closed higher for only the second time this month.

European shares jumped more than 2% by lunchtime in London after the Euro came within shouting distance of $1.55.

Both Gold and the European single currency then slipped back towards Monday's US close after the Bureau of Economic Analysis said the United States spent only $58.2 billion more than it earned overseas in January.

Wall Street economists had predicted a $59.5bn deficit. The total
still beat Dec. – including the Christmas period – by half-a-per-cent.

"Everything here is good for gold," says Frederic Panizzutti of MKS Finance in Geneva, "[but] we need to move to $1,000 very quickly or the Gold Market might lose some upside momentum."

"We should have had a better recovery [in Gold Prices] yesterday given weakness in the Dollar and strength in oil," agrees David Holmes, head of precious metals at Dresdner Kleinwort in London.

"In that context gold's performance is pretty disappointing."

The broad-based Reuters-CRB index of 23 raw commodities has now gained 32.3% since this time last year. Gold Prices, on the other hand, have risen 49% in that time.

"Since the credit crisis started, there has not been a better asset class than commodities," said Kevin Norrish, head of commodity research at Barclays to Bloomberg yesterday.

Citing a survey of 260 professionals at an investment conference in Barcelona last week, Norrish now says 34% of fund managers will put a tenth of their clients' money into raw materials this year – including Gold – up from 22% in 2007.

"It's a very strong vote for commodities," Norrish believes.

After new commodity investment flows reached $178 billion in 2007, Credit Suisse is now hiring eight new staff for its commodities business according to an internal memo leaked to Reuters on Monday.

Barclays Capital said yesterday it's hiring 30 new traders to join its 250-strong commodities team worldwide.

Citigroup Inc. – the world's largest and perhaps most troubled bank – announced plans to expand its commodities team in Asia, where it already has 17 staff, seven of them devoted to oil and metals.

Hit by $10 billion losses in the last three months of 2007, Citigroup is also moving to shore up six "highly leveraged" bond funds according to a report in the New York Times today, injecting $1 billion to help meet margin calls from its brokers.

The ASTA-MAT municipal bond funds – sold to high-net worth investors – have already received $600 million in aid from Citigroup, their original sponsor.

Citigroup refused to comment.

Meantime in Paris, Société Générale – currently reeling from a $7.5 billion rogue trader scandal – said today that an $8.5bn rights issue launched to support France's second-largest bank has been over-subscribed by eager investors.

"The success of this operation will allow Société Générale to continue its development," the bank said. SocGen's stock rose 4% on the news, while Europe's 300 largest shares jumped 2% higher on average – their first rise in a week.

On the currency markets the Euro jumped almost 1.5¢ to a new record high above $1.5490 before falling right back on better than expected US Trade Deficit data.

The US Dollar had earlier fallen towards a 12-year low vs. the Japanese currency beneath ¥101.50, while Japanese Gold Market futures slipped 0.8% to close just above ¥100,000 per ounce.

Crude oil futures meantime rose towards $110 per barrel after the Beijing authorities said China's oil imports rose 14% in Feb. compared with the same month in 2007.

Inflation in China also accelerated last month, the state news agency said this morning, hitting an 11-year record of 8.7% for consumers. The cost of food jumped by almost one-quarter after snow blizzards destroyed crops and blocked transport routes.

"We need to stay calm and take effective measures," said the official Chinese statistics bureau in its statement today.

The Beijing government wants to cut inflation to 4.8% in 2008 as a whole. But the country's one-year lending rate of 7.47% is now far below the surging cost of living.

Retail bank deposit rates are less than half the rate of inflation at just 4.14%, according to Bloomberg data, making speculation in stocks, commodities and real estate only more attractive to Chinese consumers looking to defend their wealth.

"They must raise interest rates big time," says Andy Xie, an independent analyst in Shanghai – "at least two to three percentage points this year."

(Why do Interest Rates Impact Gold Prices? To download an 18-page PDF report now, Register with BullionVault here...)

On the other side of the trade, meantime, the Chamber of Mines in Johannesburg said today that South Africa saw its gold output fall by 7.4% in 2007 – even before the power outages that shut the world ex-No.1's mining industry for five days in January, crimping power supplies at 90% ever since.

"On a year-on-year basis," noted Roger Baxter, chief economist, "the rate of decline in gold production accelerated from 5.4% in the third quarter to 9.2% in the fourth quarter of 2007. A number of issues, including stoppages related to improving safety in the industry had a negative impact on production."

South Africa's annual gold output has now halved since 1998, allowing China to become the world's No.1 producer last year – even though China's Gold Output is Also Falling.

Today the chairman of China's biggest gold miner, Zijin Mining, announced plans to increase its gold output by almost 10% in 2008.

Chen Jinghe cited the weak US Dollar as the key driver of gold's current bull market. He has seen Zijin's stock market value triple since floating in Hong Kong at the start of 2004 – just managing to outpace the price of Gold Bullion itself.

Back in Dec., the company's investment manager – Ren Guangzhi – warned that domestic Chinese gold-mining reserves could run out by 2013 unless significant new deposits are found soon.

"It's urgent for Chinese companies to develop gold mines overseas," said Guangzhi at a conference in Shanghai.

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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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