Gold News

Gold holds steady as Treasury bonds rise; South African gold output suffering

Spot Gold Prices recovered $683 per ounce by late morning in London on Tuesday, but remained shy of yesterday's 11-week peak $2 higher.

"There is good-sized buying out there with the Current Gold Market Price," said Paul McLeod at Commerzbank in New York to Reuters late on Monday. "We are also seeing the buyers move up their targets a little bit. I think the market will be supported underneath here."

Growing volumes of gold bullion held in trust to track the Gold Price are also "consistent with the view that gold will continue to benefit from flight to quality purchases," agree analysts at Goldman Sachs. StreetTracks GLD, the world's largest gold ETF, grew its holdings by nearly 5% in the last week.

Overnight in Japan, gold futures traded at the Tocom for June '08 delivery slipped 0.6% against the Japanese Yen, closing at the equivalent of $689 per ounce. The Nikkei equity index rose 0.2% for the day, but European stocks fell right from the open, losing 0.5% on the broad FTSE EuroFirst 300 index by lunchtime in Frankfurt.

London's top 100 shares traded 0.8% lower on average thanks to poor earnings results. Quarterly updates also look set to drive the action in New York's equity markets today.

"If Spot Gold is able to close at $694 the next upside objective would be $723," says Christopher Langguth for Mitsui's weekly technical note. "The price has died here on several previous attempts but this rally started from a much higher level. It has a better chance of success. There is no reason to sell now."

In the broader markets, US Treasuries continued to head for their best month since Feb. according to Merrill Lynch data, driven higher by fears of between $50 and $100 billion losses in the subprime US mortgage market as forecast by Ben Bernanke, head of the US Federal Reserve last week. J.P.Morgan analysts now warn that US house prices may lose up to 15% of their value on average by 2009.

The price of 10-year US Treasury bonds rose yet again early in London, pushing the yield another two points lower to 4.93%. J.P.Morgan says the yield may fall to 4.50% by Christmas.

"The question now is what will the Dollar do next?" asks Standard Bank in its daily note from Johannesburg today. "A key factor to be remembered is that since the 1980s the US Dollar Index has fallen to the 80 level several times and managed to bounce strongly from this key support number for the Greenback.

"However, the USD has fallen victim to a vast increase in capital spending in the last decade, resulting in a ballooning of the US trade deficit and a quick devaluation of its currency. Furthermore with many central banks slowly increasing interest rates to reduce inflation, and the Fed unlikely to follow suit for fear of damaging the already fragile US economy, the USD may well remain weak through Quarter 3 and dip below 80 on the USD Index. This is a bullish signal for gold."

Meantime in South Africa, the country's largest gold mining companies are forecast to report higher earnings but struggling output over the next two weeks according to Reuters. AngloGold Ashanti will report its second quarter numbers next Tuesday. Gold Fields reports a day later, and Harmony will give its next full update on Aug. 13th. The average Rand gold price has risen 17% from a year ago, but it only rose 1% in the three months to June as the US Dollar slumped on the foreign exchanges.

"A stronger Rand definitely erodes the profitability of South African gold miners," says Steve Shepherd, a gold analyst at JPMorgan Precious Metals Research. "Breakeven levels obviously differ from mine to mine but on average the breakeven cash costs of South African gold producers is well over $400/oz, which puts them in the top-quartile of the world’s gold producers."

Cost pressures continue to mount for South Africa's gold miners, meantime. The world's largest gold producing nation today saw a new wage offer of 7.25% tabled to the country's three largest mining unions. The mining unions have demanded a 15% raise.

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Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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