Gold News

Gold dips 1% from new 16-month high; central bank trading set to support prices

Spot Gold Prices slipped nearly 1% from a new 16-month high in late London trade on Tuesday, pulling back as US Treasury bond prices also dipped despite consensus forecasts that the Federal Reserve will cut Dollar interest rates at 14:00 EST today.

The $7 drop to a low of $714 per ounce left the Spot Gold Price barely changed from the end of Monday's session in London.

"It's good to see some consolidation and not just one steep upward pattern, which cannot be maintained," one precious metals analyst in London told Reuters.

"Everyone is waiting for the Fed decision. In the near term, I am bullish on gold but there has to be a little bit of caution as everyone seems too bullish. It would be really positive for gold if the Fed cuts the rate by 50 basis points today."

"Gold is trying to say that the Fed will cut by half a point or three quarters of a point," reckoned Frank McGhee, head of metals trading at Integrated Brokerage Services in Chicago, just before the dip.

"It's all pre-Fed jockeying of positions in today's trading." (To Buy Gold Online at live market prices today, click here to visit BullionVault...)

US inflation data released just before the Wall Street open made the Fed's task of cutting rates to defend house prices and the financial markets that much easier. Producer price inflation in Aug. dropped sharply from 4.0% in July to 2.2% year-on-year, well below analyst forecasts.

Excluding volatile food and energy, the official index rose just 0.2% for the month, but in today's action crude oil traded around a new record high of $81 per barrel in New York.

In the financial sector, stock in Lehman Bros. – the first US investment bank to reveal its latest quarterly numbers this week – rose more than 2% after it reported stronger-than-forecast results. The broader European and US stock markets also turned higher after the British government's promise to underwrite the entire deposit book at Northern Rock, the ailing UK mortgage bank.

That cut the price of US Treasury bonds, the safe haven of choice for institutional investors during the crisis beginning last month. Concerned that the Fed will be desperate to avoid seeming imprudent, futures traders have slashed their betting that the Fed will cut rates by 50 points from nearly 75% to below one-in-two over the last week.

"Credit spreads are getting better," said one New York trader to Bloomberg. "There's good buying in those markets. That's why the bloom is off the rose in Treasuries."

Meantime in the official sector, the Bank of Spain – the biggest central-bank seller of gold so far in 2007 – is reported by the Financial Times to have no further plans for "significant sales" at present.

Spain has sold a record 149 tonnes of bullion since the start of the current year of the Central Bank Gold Agreement, starting last Sept. Official-sector gold demand, meantime, has been growing from oil-exporting nations including Russia, Kazakhstan and Qatar – as well as commodity exporters such as South Africa and Argentina – says Hussein Allidina at Morgan Stanley in New York.

"There is potential for this modest level of purchasing to increase should countries like China move to diversify enormous US-Dollar denominated reserves," he told the Financial Times.

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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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