Gold News

Gold Drops 1.5% as Base Metals Fall, Equities Struggle on Lower IMF Forecast; "Dollar Crisis" Already Begun Says Ex-Fed Chairman

Gold Prices slid into the London opening on Wednesday, reaching a four-session low of $903.60 per ounce as commodity prices fell 0.5% on average and the US Dollar held steady on the currency markets.

"It's follow-through selling from yesterday," said Kishore Narne of Anand Rathi Commodities in Mumbai.

"Weakness in base metals are also pulling down the market."

Stock markets also drifted lower in Asian and early European trade today, losing 5.5% in Shanghai to end a four-day rally, while government bond prices rose everywhere bar Japan on a downgrade to economic growth forecasts from the International Monetary Fund (IMF) in Washington.

In Tokyo the final appointment of Masaaki Shirakawa as Bank of Japan governor by the Japanese parliament dented hopes of further rate cuts from the current 0.5%.

Research from J.P.Morgan says the Tokyo bond market now puts the chance of lower Yen interest rates by end-Dec. at 42%, down from 70% three weeks ago.

German bunds, in contrast, now point to a rate-cut of 0.25% in European interest rates by July.

Traders betting on US interest-rate futures in Chicago now see a 42% chance of a half-percent cut on 30th April, up from 24% this time last week according to Bloomberg.

"There seems to be value in the stock market at these levels, but there's a disbelief in the rally and, therefore, selling comes at the higher levels," said one Indian strategiest to Reuters earlier.

"I think we are still 10 to 15% away from the bottom."

Today the Sensex benchmark index lost 0.4% in volatile trade, while Indian Gold Prices dropped nearly 0.6% to 11,770 Rupees per 10 grams.

In Tokyo, Japanese gold futures dropped 1.5% to slip back below ¥3,000 per gram – the 23-year high first breached in Nov. 2007.

"Concerns about IMF Gold Sales are giving psychological pressure to the market, limiting the topside of gold," reckons Shuji Sugata at Mitsubishi Corp. Futures & Securities in Tokyo.

"The market is also reluctant to Buy Gold actively on price gains given the recent recovery in the Dollar."

Wednesday's economic downgrades from the International Monetary Fund (IMF) will mark the 60-year old institution’s fourth big announcement in three days.

On Monday the managing director, Dominic Strauss-Kahn, appealed to 60-year old Fund’s relevance amid the current global banking crisis, calling for concerted cross-border intervention.

On Tuesday the IMF laid out plans to re-organize its own finances, Selling 400 Tonnes of Gold reserves to help cover a $400 million deficit in its $1 billion budget.

And overnight the IMF warned that total losses from the international credit crunch (or Solvency Slump?) may reach $945 billion as "financial markets remain under considerable stress," according to Jaime Caruana, head of the Fund's Monetary and Capital Markets Dept.

"It is now widely acknowledged that public measures are needed in a number of areas," claims the IMF – established at the end of World War II to help run the reconstruction of Germany and Japan.

"In particular, there may be a need to shore up the prices of various types of securities to prevent fire sales."

Such "shoring up" from the Federal Reserve when it helped sell Bear Stearns to J.P.Morgan – as well as the Fed’s ongoing loans to brokerages and investment banks – took it “to the very edge of its lawful and implied powers,” said former Fed chairman Paul Volcker in a speech yesterday, “transcending in the process certain long-embedded central banking principles."

The current outlook reminds him of nothin more than the early 1970s, the 80-year old economist told his audience at the Economic Club of New York – a time when commodity prices rose sharply but the warning signs of broader, entrenched inflation were ignore.

Asked if he still forecast a crisis in the US Dollar in the near future, "you don't have to predict it. We're in it," said Volcker.

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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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