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Gold Slips as US Opens; No "Bernanke Bounce" for Dow or Europe's Stock Markets

Gold Prices fell as the US futures market opened on Wednesday, giving back one-third of Tuesday's 5.1% rally as European stock markets sank and Dow futures traded 150 lower despite yesterday's emergency rate cut from the Federal Reserve.

All 30 economists surveyed by Bloomberg now think the Bank of England will cut its key lending rate to 5.25% when it next meets on Feb. 4th. "From a European perspective," reckons Amit Kara at UBS, "the Fed cut [also] adds to the risk of more and quicker rate cuts here."

But equity traders in Frankfurt, Paris and London today failed to follow Asian investors in buying the "Bernanke Bounce" – and while Hong Kong stocks closed the day 10% higher, the Dax in Frankfurt stood 4.3% lower by mid-afternoon.

Europe-wide, the FTSE Eurofirst index of the continent's top 300 stocks has now lost more than one-fifth of its value since Dec. Whereas in the Gold Market, "we see no major downward correction on the horizon," say Gary Mead and Matt Turner, analysts at Virtual Metals in London writing for the latest Fortis Asian Metals Monthly.

"Gold has to an extent rejoined the mainstream of investment assets (albeit perhaps one for more sophisticated investors), not really for its traditional value as a hedge against inflation, but rather as a hedge against doubt and uncertainty vis-à-vis most other investment assets including equities, bonds and currencies.

"With US presidential candidates publicly outbidding each other on the amount they consider advisable to inject into the US economy to avoid economic recession...the more savvy US investors (and others elsewhere) are hunting for the best defensive/offensive asset play."

The defensive play of choice for big investors on Wednesday remained government bonds, now priced so high that annual yields are far below consumer-price inflation in the United States.

Bonds rose further still today, pushing the yield on two-year US Treasuries to 1.94%, while oil, base metal and traded food prices slipped back.

Light crude traded for delivery next month lost 1.5% to $87.80 per barrel on forecasts that US stockpiles grew by half-a-per-cent last week. On the currency markets, meantime, the Euro gave back half of yesterday's three-cent rally to dip beneath $1.4550.

That held the Gold Price in Euros at €607 per ounce. It came within €4 of a new all-time high in response to the Fed's emergency rate-cut on Tuesday, trading at its best level since Jan. 15th above €611 per ounce.

Indeed, the Fed's historic cut to US interest rates boosted the price of gold for investors and anxious cash savers the world over on Tuesday.

For British investors and savers looking to Buy Gold yesterday the price leapt 4.1% from a two-week low to hit £456, its highest level in five sessions.

The Aussie Gold Price rose 3.2%; the price vs. Canadian Dollars rose 4.1%; and gold priced in Japanese Yen rose 6.2% from its overnight low to reach ¥3,070 per gram. That was a 23-year high back in Nov., and it's barely 3% off the new quarter-century highs that Japanese investors saw on Monday last week.

On the other side of the trade, meantime, fresh problems continue to threaten gold mining supplies. Down 1% in 2007 according to the GFMS consultancy in London, global production looks unlikely to rise and meet the surge in gold investment demand seen already this year.

Goldcorp Inc., the world's third-largest gold miner, today said it will halt all new exploration spending in Argentina after the government in Buenos Aires slapped an extra 5% tariff on all gold exports last month.

The Argentine authorities also put a 10% levy on base metal production.

Meantime in South Africa – the world's No.1 gold producing nation until 2007 – the entire mining industry faces a severe shortfall in energy supplies.

Leading utility firm Eksom advised the Johannesburg government last month to hold off marketing South Africa for energy-intensive projects until 2013.

South African gold production has already halved in the last decade, but its decline is not isolated. "Canada's gold production was down by 6.6% over the past five years, South Africa 6.8% and the United States 5.4%," the Chamber of Mines' chief economist, Roger Baxter, told the Classic Business show this week.

"All the majors have experienced falling output."

Management at Gold Fields, the world's fourth largest gold company, reckon the energy-supply shortage at Eksom will leave them enough power to dig the world's deepest gold mines at Driefontein and South Deep. But they're concerned Eskom can only guarantee additional capacity beyond 2010, reports MiningMX.com.

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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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