Gold News

Gold Drops After Chinese Investors Pile In; "Stagflation Light" Promises More Gains Ahead

Spot Gold Prices fell sharply as New York opened for business on Wednesday, falling 1.8% from the morning's new record high of $891 per ounce on news that US mortgage applications grew strongly last week.

The Mortgage Bankers Association said volume rose by nearly one-third in the week-ending 4th Jan. But the shortened first week of the New Year always gives a volatile reading, and behind the headline surge, mortgage applications remained 13% below the start of Dec., with refinanced loans accounting for a massive 57% of all applications.

Investors wanting to Buy Gold today took their chance to enter the market at $875 per ounce – just 0.3% below last night's US close – as European stock markets continued a torrid day and Wall Street futures were flat. Physical gold for immediate delivery had earlier touched £450 for British gold buyers. The Gold Market broke a record €600 per ounce for European investors overnight.

Tracking back on pre-Euro prices, that's the highest Gold Price in Europe since the French currency crisis of 1983.

In Asia today, China's new gold futures market leapt 14% on its debut, breaking through the Shanghai Futures Exchange's daily price-limit on turnover worth $2.75 billion.

The contract size of these new gold futures was earlier set at 1,000 grams – three times greater than first planned – in a bid to deter smaller investors. But one Shanghai futures brokerage told the People's Daily this morning that private individuals have made "mounting enquiries" to enter the Gold Market regardless.

The China Securities Journal also reports people queuing up to open brokerage accounts in the east of Zhejiang Province.

Across the East China Sea in Tokyo, the most-active gold futures contract at the Tocom reached its highest value in Japanese Yen since March 1984, while the Nikkei stock-market index fought to recover an initial 1.7% drop after Tuesday's ugly sell-off on Wall Street, finally managing to end the session 0.5% higher.

Ahead of the MBA mortgage news, US Treasury bond prices had already dipped for the first time in 10 days, taking the 10-year yield three pips higher to 3.81% as crude oil prices rose almost a dollar to $97.14 per barrel on the threat of an "imminent attack" by militants in Nigeria, the world's fourth largest oil producer.

Soybean futures rose to a new 34-year high in Asia trade, and corn hit levels last seen in 1997. Copper, nickel, zinc and aluminum also shot higher.

"'Stagflation light' is a fair description of what the US economy is going to look like for the next quarter or two," says Avery Shenfeld of CIBC World Markets in the Toronto Globe & Mail today. "That creates a very bullish environment for gold.

"You're getting everything you need – falling interest rates, a weak US Dollar due to the weakness in growth, but also lingering inflation concerns."

Tuesday's bad news for US consumer stocks – which helped take the Dow to its worst start to the year since 1978 – was also mirrored today at the opening in Europe. First Germany's statistics bureau said retail sales in the world's third-largest economy fell 3.2% in November from the same month in 2006.

Then in London, Marks & Spencers – the bellwether UK food and clothing store – reporting a 2.2% drop in its Christmas sales.

M&S shares dropped 17% in response, dragging retail stocks lower across Europe and knocking 1% off the blue-chip EuroFirst 300 by lunchtime. The news also sent the British Pound reeling, down to a record low of £0.749 per Euro and a five-month low beneath $1.9600 to the Dollar.

"The news from M&S adds to the flavor that sentiment towards the UK economy is eroding," says Paul Mackel at HSBC. "People are quite happy going short of the Pound ahead of Thursday's interest rate decision from the Bank of England."

Since this time last year Sterling has now dropped 7.5% of its value against the world's other major currencies. Measured against the Gold Price in British Pounds, however, Sterling has dropped 10% of its value since the start of this month alone.

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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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