Gold News

Gold Dips Below $1,000 as Leveraged Speculation Hits Record, Gold Coin Buying Flags, IMF Details 403-Tonne Sales

Gold Prices declined further from last week's 18-month high at $1,024 an ounce early in London on Monday, briefly dipping below $1,000 as world stock markets also fell, losing almost 1% on average.

Crude oil sank to a one-week low near $70 per barrel, while the US Dollar bounced almost a cent against the Euro from last Thursday's 12-month lows.

Government bonds were little changed ahead of Wednesday's policy decision from the US Federal Reserve.

Finance headlines meantime caught up with Friday's late news from the International Monetary Fund, confirming its long-announced sale of 403 tonnes of bullion – around one-eighth of its total hoard.

"We maintain that Gold should be bought on dips," says Walter de Wet, senior commodities analyst at Standard Bank in London.

"Precious metals have been finding strong resistance to a move higher. But we believe the large amounts of liquidity provided by central banks can only serve as good support to precious metals on the downside."

"The big picture remains bullish," agrees London market-maker Scotia Mocatta in a client note, "and although a downside correction in the wider markets might still drag Gold Prices lower as investors move into cash, the secondary reaction might be for investors to store their cash in bullion.

"The Dollar and other currencies could well suffer if the markets enter another period of turbulence."

Today the US Dollar jumped on the currency markets as risk assets dropped, helping support the Gold Price in Euros above €680 an ounce.

UK investors and savers now looking to Buy Gold saw the price unchanged from Friday's finish above £619 an ounce.

"Sterling and the Dollar are both the victims of Quantitative Easing," writes Steven Barrow, chief currency strategist at Standard Bank, in his market note today.

"The Pound has been insulated from this a bit because it has been able to rally at the expense of the universally weak Dollar this year. But clearly on a cross basis, the Pound has suffered and it does not look as if this suffering is over."

Today the Pound fell to a five-month low vs. the Euro, even as the single European currency slipped vs. the Dollar.

Intended to "put the financing of the IMF on a sound long-term footing, and enable us to
step up much-needed concessional lending to the poorest countries," accordint to managing director Dominique Strauss-Kahn late Friday, this year's IMF Gold Sales – its first since 1976-1980, when prices rose 8-fold as it sold one-third of its holdings – "will be conducted in a responsible and transparent manner that avoids disruption of the gold market."

The IMF says it will offer gold directly to central banks, but only ever at market prices, rather than a discount.

Alternatively, it may conduct sales onto the open market, capping its sales within the new Central Bank Gold Agreement due to commence next weekend.

The IMF is not a signatory to the CBGA, but the new five-year agreement – the third since 1999 – limits total sales by Europe's central banks to 400 tonnes annually.

Sales during the current CBGA year, starting Sept. 2008, have undershot that level by almost two-thirds. Central banks worldwide thus turned net buyers of gold for the first time in 20 years during the first-half of 2009 according to the GFMS consultancy.

Data from the Russian central bank today said it added 9.4 tonnes to its hoard – now the world's 11th largest official stockpile – in August.

Over in the retail market in contrast, "Right now we are seeing a sharp increase in people selling Gold Coins to us," said Pat Heller of Liberty Coin Service in Lansing, Michigan, to the Numismaster website late last week.

"We have had some people buying from us, but we haven't seen any particular increase."

Gold Dealer Julian Jarvis of Greencastle, Indiana, agrees there's no buying pressure on the coin market right now, telling Numismaster that dealer mark-ups on Gold Coins are "the cheapest they've been for two years."

Jarvis is charging 5% mark-ups on Gold Coins. Last autumn's rush to Buy Gold from small dealers and online coin shops saw premiums reach 10% on average, with widespread reports of shortages as anxious savers emptied dealer inventories from Germany to Canada and California. (See how Lehman's Collapse Spurred the Gold Market here...)

Leveraged speculators, on the other hand – forced out of gold dealing by last autumn's credit crunch – have now built up their largest-ever position in bullish Gold Futures and options.

According to latest data from US regulator the CFTC, the "net long" balance of bullish minus bearish bets by hedge funds and other non-industry players added further to early Sept.'s 20% jump in the week-to-last-Tuesday.

Now equivalent to 793 tonnes of metal, the speculators' net-long position in futures & options is nearly 14% greater than its previous peak of Jan. 2008.

Gold ETF positions have also pushed higher, but only slowly. Standard Bank estimates 42 tonnes have been added to global trust-fund holdings since the start of Sept., with nine tonnes added last week to make a total hoard of 1,687 tonnes.

"I think a big increase in production from the world's gold mines would drive the Gold Price back down," says Evy Hambro, co-manager of BlackRock's Gold & General Fund, in an FT interview.

"But it takes many years to build a new gold mine, and we don't see that happening in the near future.

"Also significant [would be] exploration success," says Hambro, attributing a large part of the last decade's Four-Fold Rise in Gold to declining mine output.

"If people were to discover large new sources of gold, or a new technology that would lower the cost of production, making formerly uneconomic deposits economic today, that would also have a material effect on the gold market. But we can't see that at the moment."

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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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