Gold News

Gold Drops to Near 4-Week Low as Dow Slumps, Oil Slips; Bond Yields Fall Further Below US Inflation

Gold Prices fell $10 on Monday to dip beneath $776 per ounce – a near four-week low – as world stock markets sank, crude oil fell, the Dollar held steady, and Treasury bonds rose once again.

Goldman Sachs – the only major US bank to avoid reporting severe losses caused by the collapse in subprime mortgage lending to date – downgraded its forecast for Citigroup, the world's largest bank, warning it may lose $15 billion on its credit-market investments over the next six months.

The S&P fell 1.2% on the news, and the Dow dropped below 13,000 for the first time since August.

Two-year US Treasury bonds, in contrast – the "safe haven" of choice for professional investors – were yielding 3.28% by lunchtime in Manhattan, the lowest return offered to new buyers since Feb. 2005.

Interest-rate futures now put the chance of an interest-rate cut when the Federal Reserve meets in early Dec. at 75%. But "the Fed will not only need to save the financial markets, reckons Tom di Galoma at Jefferies & Co. in New York.

"In very short order they're going to have to start saving the economy."

Di Galoma believes two-year Treasury bond yields will drop to 3% by the end of June next year, and 10-year yields will fall below 4%. Lacy Hunt, chief economist at Hoisington Investment Management in Austin, Texas, thinks the Federal Reserve will slash its target lending rate to 2%.

Two-year Treasury yields, however, are already well below the latest reading of US consumer-price inflation at 3.54%. The current 19-year high in soybean prices – at a time when China's domestic inflation rate has reached a 7-year peak of 6.5% – could soon see US consumers importing an ever-higher cost of living.

Dollar-bond holders will get squeezed between those rising costs and falling yields. (To get the full story on What Negative Real Rates Mean for Gold, read on...)

The threat of inflation was ignored on Monday, however, as base metal prices fell and oil prices slipped back from an overnight spike to $94 per barrel. Here in London the FTSE100 index ended the day 2.7% lower and the Pound Sterling dropped to a new four-and-a-half year low versus the European single currency.

That drop helped peg the Gold Price in British Pounds above £379 per ounce, down 1.0% for the session.

For French and German investors looking to Buy Gold Today, the price fell throughout European trade to finish at a four-week low beneath €530 per ounce.

Gold Mining Stocks traded in the United States magnified the fall in Gold Prices, meantime. The Amex Gold Bugs index (HUI) lost 2.4% in the first half of the US session; the Philadelphia index of gold & silver miners (XAU) fell by more than 4%.

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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.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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