Gold News

Gold Drops 7.3% from Record High, Dollar Rally "Temporary" as Russia Extends Bullion Hoard

Gold fell sharply at the start of London dealing on Monday, extending its drop from Thursday's new record highs to 7.4% as the US Dollar rose and European stock markets fell.

Recording its lowest Gold Fix in London since Nov. 20th at $1147.50 an ounce, the price of gold also hit a two-week low vs. Euros and Sterling.

The US Dollar hit its best level in a month against both the European single currency and the Japanese Yen.

Priced in Dollars, crude oil fell towards an 8-week. Government bond prices rose, pushing the yield offered by 10-year US Treasuries down to 3.44%.

"We could be looking at continued liquidation today," says one London gold dealer.

"There is talk of sell stops in the low $1130s," adds a Hong Kong trader."

"Since August, we have advised buying dips in gold," says Walter de Wet at Standard Bank. "We now advise selling into rallies on approach of $1200 – probably our new strategy into year-end."

"Being a Dollar bear is not risk-free," says de Wet's colleague at Standard, Steven Barrow. "But...we maintain that [a Dollar rally] would be temporary and that the Euro will reach at least €1.60 next year."

Attempting to put a valuation on gold, a survey of 218 fund managers running $530 billion between them says that 25% think gold is over-priced – up from 11% in October – according to Bank of America Merrill Lynch.

"If the world falls into an abyss, gold could be a store of value," said James Paulsen, manager of $375 billion at Wells Capital Management in Minneapolis, to Bloomberg overnight.

"[But] from my experience, the world has not ended yet."

On the data front early Monday, the Obama administration in Washington said it's cutting the projected cost of rescuing US banks from $341 billion to $200bn since "Treasury's investments to stabilize the system are delivering higher returns than anticipated," according to an official.

Mounting defaults on commercial real estate could prevent regional banks from repaying their share of TARP for another two years or more, however, says New York-based Real Estate Econometrics.

"[Last Thursday] the European Central Bank said it would remove its crisis support," notes Kazuhiko Saito at Fujitomi Co. in Tokyo, "[and] I think that made global investors wonder if the US might be next.

"I don't think gold would have fallen quite this much if that statement hadn't been made."

Commenting on last week's "no change" decision from the European Central Bank, ECB president Jean-Claude Trichet today confirmed to an audience in Paris that "The current level of interest rates is appropriate."

The Euro fell 1¢ on Trichet's comments, while new data showed German factory orders falling 8.5% in October from the same month last year.

The Sentix index of Eurozone investor sentiment rose from Nov., but fell below analyst forecasts.

Gold Bullion has been the best-performing asset bar none this decade, London's Sunday Times yesterday noted, catching up with a Guardian report from the previous week and BullionVault analysis from Jan. this year.

Gaining 323% from the start of 2000, gold has outpaced crude oil, fine wines, real estate and fine art.

Cash savings beat the stock market, despite paying nothing above inflation over the last 10 years on average. Equities delivered their worst 10-year returns since 1899 according to Barclays Capital.

Back in Monday's action, and over in the typically hungry Indian gold market, "Demand in terms of volume has been good this morning," said a private-bank dealer in Mumbai to the Economic Times.

"I have plenty of orders in the range of $1140-1145 an ounce," said a trader at a state-run bullion bank.

On the central-bank front, Renaissance Capital in Moscow said the Russian state accelerated its gold reserve purchases at the end of Nov., probably adding $790 million of bullion in one week.

Russia's gold holdings equaled $23 billion on Dec.1, up by 13% from the start of last month.

"Having bought 200 tonnes of gold, the Reserve Bank of India might wait" said former central banker and chairman of the Indian prime minister's Economic Advisory Committee (PMEAC) C.Rangarajan today.

After buying at an average of price of $1045 from the International Monetary Fund (IMF) in Oct., "I think there is no particular hurry to buy more," Rangarajan told the Press Trust.

"At the moment, I think they have made a substantial increase to the total quantity of gold they have.

"There is no hard and fast rule, but some proportion of the reserves being maintained in the form of gold is good."

Formerly the world's No.1 private gold market, but overtaken in 2009 by Chinese households, India currently holds 2.3% of its central-bank currency reserves in gold.

Russia holds 4.1% of its forex reserves in gold. World No.1 hoarder the United States stands at 79% according to World Gold Council data.

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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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