Gold News

Gold rallies as calls mount for US rates cut; foreign investors reduce bond holdings

Spot Gold Prices recovered half of Thursday's 0.5% loss early Friday, dipping to an AM Fix in London of $659.75 before rising to touch $662 per ounce by lunchtime.

"People are nervous and not sure how gold is going to react," says Matthew Turner, an analyst at Virtual Metals. "It depends so much on the outside market.

"If the credit problems ease and go back to normal then gold might start gaining towards $670-$675."

John Reade at UBS in London agrees that gold is being shunned by professional investors as the credit crunch wears on. "There isn't much appetite from anybody we know to put on risk in many asset classes," he told Bloomberg today. "If you're sitting with cash, everything is a risk position."

But "while central banks continue to sell gold and institutional investors have liquidated non-physical long positions in the past few weeks, the physical demand from the jewelry industry as well as the private investor rose," says today's report from Wolfgang Wrzesniok-Rossbach at Heraeus, the global refining group.

"Our colleagues in Hong Kong, like us here in Germany, have seen significantly more sales of physical metal [this week] to jewelers and also to retail investors than in past months. Demand by the latter group is being partly driven by the lower prices, but there is certainly also an aspect of safe haven buying. Those investors are looking mostly for larger investment bars with a weight of 100 gram or more."

For time being, the preferred "quality" asset of Wall Street institutions – US Treasury debt – continued to rise early Friday, even as the Dollar fell hard on the currency markets.

The Euro broke above $1.36 for the first time in 10 days, taking the gains from last Thursday's two-month low to 3.7% for currency speculators selling the Dollar. That move knocked 0.6% off the Euro Price of Gold, pushing it down towards Thursday's low of €485.25 per ounce.

British investors wanting to Buy Gold Today saw prices slip below £330 per ounce as the Pound continued to trade above $2.00 after official data showed the UK economy growing by 3% year-on-year between April and June.

While spot prices for physical gold bullion dipped, sharper sales were seen in Tokyo's gold futures market. The Tocom contract for June '08 delivery dropped 0.6% against the Yen to close the week equal to $664.27 per ounce. The Nikkei stock-market index meantime dipped, but it ended the day 6.4% above last Friday's close.

European stock markets were volatile but little changed by lunchtime. US stock index futures pointed to a weak start as traders awaited the durable goods report for July at 08:30 EST, followed by July's new home sales data at 10:00. The most common forecast amongst 73 economists interviewed by Bloomberg News is for a 1.7% drop from June's figure, taking the number of new US home sales to its lowest level since June 2000.

To counter falling home prices and avoid "an asset deflation never seen since the Great Depression," Bill Gross of Pimco – the world's largest bond fund manager – has now called for intervention by the US government. Kazuo Mizuno, chief economist at Mitsubishi UFJ in Tokyo believes falling real estate prices will tip the United States into recession between Jan. and March next year. The head of Ford, Alan Mulally, yesterday called for lower Fed interest rates as credit conditions are now a major concern.

"Regarding the Fed, it's not a case of if they cut rates but rather by how much," reckons Stuart Thomson, a manager of $46 billion in bonds at Resolution in Glasgow, Scotland. "Bond yields are going to move sharply lower from here."

But on the other side of the trade-off between bond yields and inflation, meantime, "base metals remain well bid," says today's note from Standard Bank in Johannesburg, "[and] WTI and Brent crude oil crept higher on Thursday. On the inflation side it appears that wheat prices are set to continue at record levels as Canada, the world’s second-largest wheat exporter, said output might be 20% below last year’s level because of adverse weather conditions."

Even so, 10-year US Treasury yields slipped again as prices rose early Friday, losing another two points to 4.63%. Two-year bond prices were also bid higher.

Non-US investors, however, cut their holding of Treasuries held at the Federal Reserve by $25.1 billion – some 2% – in the week ending 22 Aug according to data released Thursday. The much-demanded cut in US interest rates, plus any kind of tax-funded intervention to support house prices, would most likely cause the decline of the Dollar to accelerate once again.

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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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