Gold News

Gold Falls Near One-Week Lows on Dubious US Data; Now Set for a 15% Drop?

Spot Gold Prices dropped towards yesterday's one-week lows in early New York trade on Thursday after the US government reported stellar economic growth for the third quarter.

The 4.9% rise in GDP came thanks to a surge in exports, aided by the sinking Dollar, plus a mysterious – and unlikely – collapse in domestic US inflation.

"The Gold Market has been a on roller-coaster ride for the past ten days," says Wolfgang Wrzesniok-Rossbach in today's Precious Metals Weekly from Heraeus, the German refining group.

"After several failed attempts at breaking the 1980 all-time high of $850 an ounce, we may now well be seeing a consolidation phase. The overall environment however remains friendly to gold, and next year we could possibly see the metal climbing above the aforementioned top level."

Stock futures slipped after Wall Street's fastest two-day rally in five years, led lower by a shock 99% drop in earnings at Sears, the US retail group.

European equities remained flat for the day, while crude oil prices stayed more than 3% higher after spiking back above $94 per barrel on news that a fire hit key pipelines in Canada, potentially shutting down one-fifth of US oil imports.

Enbridge Inc., Canada's largest pipeline group, later confirmed that two members of staff have died in the blaze, which is now extinguished. Half the pipe's capacity is now back onstream.

"More accident-related deaths at the South African gold mines were also reported," Wrzesniok-Rossbach goes on. But "given the reduced influence of South Africa in the gold sector – and the high gold liquidity in the market – such news has relatively little effect on the Gold Price."

South Africa remains the world's largest single gold producer, but annual output has now halved in the last decade. India's gold output, on the other hand, has risen some 30% in the last 12 months.

China grew its gold-mining output by 13% in the first nine months of this year, and may overtake South Africa as the world No.1 by 2012.

Today's US data, meantime, put economic growth at 4.9% annually – the fastest rate since summer 2003, and one whole percentage point above the Commerce Dept.'s initial estimate of last month.

Consumer inflation was pegged at 1.7% annualized, unchanged from Oct.'s data release. And yet the GDP deflator – used to temper the headline rate of growth by accounting for inflation in prices – was calculated to run at only 0.9%.

Dropping from 2.6% in the second quarter – and revised slightly higher from the initial estimate of 0.7% – the GDP deflator in fact dropped towards a four-decade low. Only this March it hit a 16-year high of 4.2%.

Between then and the end of the third quarter, the US Dollar – used to pay for imported goods and services from abroad – lost more than 7% of its value on the world's currency exchanges. The price of crude oil rose by nearly one-half.

Accurate or not, today's GDP figures helped the US Dollar overcome a sharp rise in New Jobless Claims for last week (+6.7%) and a surprising weak number of New Home sales during Oct. (–3.0%).

The greenback pinned the Euro below $1.4750 and kept the British Pound more than two cents down for the day at $2.0600. The Gold Price in Sterling bounced off £386.50 per ounce, almost £1.50 above Wednesday's low.

For European investors wanting to Buy Gold Today, the price pulled back towards €540 for the fourth time in two days.

"We think gold's gone a long, long way," said Jim O'Neill, chief economist at Goldman Sachs, in an interview with Bloomberg today, "and we think it's due for a 15 to 20% move down.

"We see scope for acceleration through $770 to re-test the $600-650 levels prevailing ahead of the summer."

Only this Tuesday, however, O'Neill's colleague at Goldman Sachs in New York, Oscar Cabrera, forecast average Gold Prices in 2008 of $800 an ounce, up from $687 in 2007.

"We see upside risks to our forecast," Cabrera added – meaning that the Gold Market looks likely to rise above even his revised targets.

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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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