Gold News

Gold Down vs. Dollars, Up Against Sterling & Euros, as Financial Markets Fear 2008 "Deja Vu"

The price of Gold bounced from its lowest level against the US Dollar in two-and-a-half weeks early Monday in London, recovering last week's close at $992 an ounce as the New York opening approached.

European equities held flat but Asian shares finished the day sharply lower. The US Dollar jumped again on the foreign exchange market, but was outpaced by the Japanese Yen, which reached an 8-month high on rumors – denied today – that the new Tokyo government is happy to see its currency rise, depressing exports.

Government bonds ticked lower. Crude oil slipped below $66 per barrel – more than 8% below last week's start.

"Positioning in the precious-metals [futures] markets remains very extended," says USB analyst John Reade in London.

"If the Dollar remains strong, and/or broader asset markets stay under pressure, then Gold and silver could trade much lower in the coming weeks."

Another UBS strategist, quoted in the latest Economist magazine, notes of all financial markets that "Liquidity has been a much bigger driver than fundamentals. Liquidity-driven rallies have a habit of reversing violently without warning."

Latest data from US regulator the Commodity Futures Trading Commission (CFTC) showed after Friday's close that the outstanding volume of open Gold Futures contracts rose again last week, adding 1% to a new 12-month high.

Hedge funds and other speculative players betting with borrowed money raised their "net long" position (of bullish bets minus bearish bets) to a new all-time record equal to 795 tonnes via the Gold Futures and options market.

The trust-fund traded as SDPR Gold on the New York stock market grew the volume of bullion held to back its shares by 0.7% to 1,094 tonnes.

London's major Gold ETF provider, ETF Securities Ltd, said it's increased its bullion holdings to a record 261 tonnes.

"Gold's recent weakness has attracted some fund buying interest," says Walter de Wet at South Africa's Standard Bank this morning."

"Increased investment fund flows may see Gold continue to garner support should prices weaken further. Resistance is at $996."

Overnight, and following US President Obama's accusation that Iran has built a second nuclear installation in contravention of international law, Tehran's Revolutionary Guard announced the successful test of long-range missiles which analysts believe could reach Israel and US bases in the Gulf.

The Gold market, however, "is paying very little attention to geopolitical issues at the moment," notes one London dealer, citing instead the US Dollar's fourth daily gain in succession.

"Could it be a case of déjà vu all over again?" asks Steven Barrow at Standard Bank in London, pointing to summer '08 – when a sharp drop in oil prices was followed by a surge in the US Dollar's exchange-rate value.

As a result, the Gold Price in most major currencies hit new record highs last October, even as gold priced in the US Dollar dropped one-third from its peak of $1,032 an ounce.

"The market might fret about weaker global growth or the crackdown on speculative positioning in the commodity market," says Barrow. "But unless these same fears lead to a liquidity squeeze, which we doubt, any oil price weakness should not drag down Euro/Dollar, nor give the Dollar a lift on a global basis."

Today the European single currency bounced from a sharp sell-off to two-week low vs. the Dollar at $1.4570, but the Gold Price in Euros still rose, briefly recovering more than half of last week's 1.5% drop.

The Gold Price in British Pounds – rising for seven of the last eight weeks – spiked to a new five-month high above £629 an ounce as Sterling sank yet again on the forex market.

On the monetary policy front, meantime, leaders of the G20 industrialized nations moved from their meeting in Pittsburgh to Istanbul, Turkey, for the annual meetings of both the International Monetary Fund and the World Bank.

Last week's G20 summit ended with a pledge to cap bankers' pay, impose new regulatory reforms, and develop a "framework" for balanced global growth.

"We've brought the global economy back from the brink," claimed US president Barack Obama.

Restating their commitment to a joint package of $1.1 trillion – first announced in London this April – the G20 nations have so far injected stimulus equal to 2.0% of their aggregate GDP for 2009, planning stimulus of 1.6% for 2010.

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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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