Gold News

Gold Dumps $12 from 4.5% Surge as Dollar Hits Crisis; Change in Currency Regime Now 'Inevitable'

The Gold Price dumped more than $12 an ounce early Wednesday from its peak in the Asian session at $807.45 – nearly 4.5% above Tuesday's low – as world stock markets plunged, the US Dollar sank to new all-time lows, and crude oil came within 71¢ of $100 per barrel.

Investec Australia today puts support at $775 and resistance at $805 per ounce. But "the three month trendline [higher] has now broken," counters Phil Smith for Reuters India.

We're seeing "nice technical behavior after the very predictable bounce off that huge resistance at the old 1980 high" of $850, he believes.

On a fundamental basis, however, this wild volatility in Gold Prices coincides with a genuine crisis in how the world prices crude oil – and with it, the US dominance of global politics and finance.

"Some sort of change in currency regimes is inevitable," says Citigroup Global Markets in a note today, studying the pressure on Middle Eastern oil-producing nations to stop pegging their currencies to the US Dollar.

"The fundamental reasons for a revaluation are so strong."

Last weekend, Iranian president Mahmoud Ahmadinejad argued at a meeting of the Opec oil cartel for a switch to pricing crude in a currency other than the US Dollar. Yesterday, the Al-Riyadh newspaper in Saudi Arabia quoted Abdel-Aziz Aluwaisheg – the Saudi head of research at the Gulf Co-operation Council – as saying that his government was considering a revaluation of the Riyal.

"There is a common desire in the GCC to revalue member currencies and shift from a Dollar peg to a currency basket," the paper quoted him. In September, the Saudi government failed to cut its interest rates alongside the US Fed for the first time.

This morning, however – and with the region's Dollar-pegged currencies hitting a series of five-year highs against the greenback – Aluwaisheg denied the story. But futures markets are now betting on a 3.1% appreciation in the UAE's Dirham and a 2.7% rise in the Saudi Riyal.

The Kuwaiti Dinar – cut free from its Dollar peg earlier this year – today made its second-biggest jump since floating in May, taking its gain vs. the Dollar to 5.35% so far.

"It looks like a weak Dollar and strong oil are going to be around for a while and there's been no dramatic change in the Gold Market environment," reckons Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo.

"Moreover, there's no fresh incentive for gold to head much lower."

Gold Priced in Euros peaked this morning at €543.20, even as the single currency hit a new life-time high against the Dollar above $1.4850. For British investors wanting to Buy Gold Today, the price slipped back after failing to hold above £390 per ounce – a five-session high.

Tokyo's Nikkei average closed the day at a 16-month low, and the Hang Seng index in Hong Kong dropped 4.1% of its value. European stock markets gapped down 1.3% at the opening.

By lunchtime in Paris, the CAC40 index had lost nearly 2% at a two-month low.

"The [finance] market is very nervous," says Jonas Thulin, a strategist at Calyon in New York. "People are holding a sober view that we haven't seen the worst from the subprime and credit issue yet. It's pushed people to buy the Yen and sell risky assets."

The Yen continued to surge against all 16 of the world's most-actively traded currencies early today, pushing the US Dollar as low as ¥108.84 overnight.

The British Pound slipped towards ¥223.00 – its lowest level since August's 10-month low – while the Euro dropped 1.7% to retest support at ¥160.50. The New Zealand Dollar, formerly the "darling" of carry-trade speculators selling Yen to buy higher interest-rate currencies, plunged 3.1% this morning to hit a one-week low of ¥81.60.

At its height, and after a 7-year bull market that saw it double in terms of the Japanese currency, the Kiwi was worth more than ¥98.

As the zero-yielding Japanese Yen was bid higher as a "safe haven" today, government bond prices also continued to surge after the US Federal Reserve cut its economic growth forecast last night.

The Fed's outlook is now for 1.8% growth at worst in 2008, sharply down from the 2.5% minimum forecast as recently as June. Unemployment is pegged to reach 4.9% from the current 4.7%.

Inflation – despite crude oil nearing $100 per barrel – is forecast to evaporate, vanishing from 3.5% in October to average 1.9% in 2008.

Bidding up US Treasury bonds to lock in a yield – any yield! – before the Fed next cuts rates in December, investors today pushed the yield on two-year notes down 9 points to 3.10%. It stood above 5.0% as recently as June.

The yield on 10-year US Treasury bonds, meantime, fell today below 4.0% for the first time since June 2005. It had reached a five-year peak this summer above 5.15%.

Who's buying US bonds even as yields vanish, inflation soars, and the Dollar collapses? To read more now, click here to get the story on Bonds, Gold & the Real Rate of Interest...

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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