Gold News

Gold dips as European credit crunch bites; food-price inflation looms

Spot Gold Prices continued to trade in a tight range early Tuesday, moving just $1 either side of Monday's London start before dipping below $656 as European stocks gave back their opening gains.

"The rebound in equities [has] helped support gold," reckons Wallace Ng at Fortis Bank in Hong Kong. "We also saw a bit of physical demand coming in this morning."

Asian stock markets rose for the second day running on Tuesday after closing out their worst week in 17 years on Friday. But the credit crunch that began shaking world money markets at the end of July continues, with short-term US Treasuries attracting "safe-haven" cash at the fastest rate since the stock-market crash of Oct. 1987.

In the European market for asset-backed commercial paper (ABCP) – which "started modestly as a way for banks to move assets off their balance sheet" at the beginning of this decade, as TheBanker.com puts it – companies failed to refinance more than 80% of notes maturing yesterday according to data from Dealogic.

"We've seen physical [gold] buying at the lower end, especially on Friday," said Ronald Leung of Lee Cheong Gold Dealers in Hong Kong to Reuters earlier today. He expects fresh buying from jewelers as well as investors to continue supporting the Gold Market.

"We saw a lot of buying at below $650. I think we'll see a trading range of $645-$665 before the Fed meeting [on Sept. 18th]."

In the Tokyo gold market today, futures contracts for delivery in June '08 ended the session little changed and equal to $667.56 per ounce. The Nikkei in Tokyo gained 1%; the ASX in Sydney added 0.8% to the 4% gains made on Monday; South Korea's Kospi 200 index – the world's busiest stock market for derivatives traders – gained more than 5% for the day.

"Whether market turbulence has dissipated for now or whether we're simply in the eye of the storm remains to be seen," says Investec Australia in a note today. "The only certainty is that everyone has a view and that everyone is happy to share it."

The global banking group's gold comment today puts support at $650, with resistance at $676 per ounce.

Looking at the weekly charts, "Spot Gold Prices fell to a seven-week low [on Friday] but managed to climb back above the up-trend line," notes Christopher Langguth for Mitsui today. "A close below $640 would have completed a double top."

Phil Smith for Reuters Technical India also shows the Spot Gold Market ending last week right on the uptrend starting in July 2005. He pegs support at the 200-day moving average, currently sitting at $655 per ounce.

"The decline [last week] should have cleared out a lot of stale long positions," Langguth goes on, "but the close was neutral. A rally to $677 should have a lot of traders racing to reestablish their long positions."

In the crude oil market, meantime, prices slipped again this morning as forecasters said that Hurricane Dean – the "potentially catastrophic" storm now making landfall in the holiday resorts of Mexico's Yucatan Peninsula – will miss US oil facilities in the northern US Gulf Coast.

WTI Nymex crude oil contracts for Sept. delivery fell nearly 50 cents to $70.66 per barrel in early London trade. It touched a record high of $78 at the start of this month.

Inflationary pressures may persist in food stuffs, however, even if energy input prices continue to decline. Soybean futures rose after the US government said Monday that only 54% of the current crop ratings are good or excellent, down from 56% a week ago. China's domestic soybean output is also set to fall amid a prolonged drought, potentially losing 17% from last year and causing imports of 31.4 million tons in the 12 months beginning Oct.

Inflation also continues to dent the gold-mining sector's profitability. Simmer & Jack, a South African gold development and production company, tells MiningMX.com that output at its two current operations has risen by 13%, but costs have also spiked thanks to an 8.2% wage increase and the first month of higher-cost winter power tariffs.

If you're concerned about inflation, most especially now that bond prices point to sharply lower interest rates for savers and investors, you may wish to consider an allocation to physical gold bullion. To Buy Gold Online Today, accessing the very best prices enjoyed by private investors worldwide, click through to BullionVault now.

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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