Gold News

Gold Demand "Subdued by High Prices" as Gold's Euro and S&P Correlations Slip

The Gold Price dropped to a near-two week low early Thursday in London, dipping below $1090 an ounce as the US Dollar rose vs. the Euro, crude oil held flat, and world stock markets slipped.

"Yesterday saw a new divergence in the Gold/Euro correlation," says one London dealer in a note after the Euro rose in Wednesday's trade but gold priced in Dollars fell.

Also continuing to display a strong one-month correlation of +0.91 with the US stock market, the Gold Price still ended Wednesday below the nominal price of the S&P 500, dropping to a new two-week low of $1090 as the index rose to 1,105. (Read more about Gold's S&P Correlation here...)

"The Euro is now, for the first time since its introduction, in a difficult situation, but it will come through," German chancellor Angela Merkel tells the Frankfurter Allgemeine Zeitung newspaper today.

"There is financial speculation against countries which had an unfavorable starting position and unsolved structural problems. That is dangerous."

Second-only to the South African Rand in losing value against the US Dollar so far in 2010, the Euro's effective exchange rate index – a weighted average of its different trading partners' currencies – "has fallen the most year-to-date," says analysis from French bank Natixis, "down more than 4%."

Both the Euro and Sterling fell on Thursday's currency market to new 9-month lows versus the Dollar, putting a floor under the Gold Price at €805 and £706 an ounce respectively.

Gold stood 3% below last week's record Euro high of €26,716 per kilo.

"Two figures to compare," says Wolfgang Wrzesniok-Rossbach, head of sales at German refining group Heraeus in Hanau.

"The last official gold fixing at the Frankfurt stock exchange before the Euro's introduction was DM 15,500 (€7925) on 30 Dec.1998.

"The historic high in DM terms was DM 46,530 (€23790) on 21 Jan. 1980."

Here in 2010, and since gold hit its latest Euro-price record, "Demand for Gold Bars in Germany was subdued," says Wrzesniok-Rossbach. "Our colleagues from Hong Kong report a similar situation."

Scrap gold sales have also risen in China, where "Investors and industry stayed on the side-lines, initially because of the New Year holidays [but also] because of the higher prices.

"Central banks also appear to be holding back on their buying in view of the high Gold Price," says Heraeus' latest Precious Metals Weekly, pointing to the International Monetary Fund's decision to sell the remaining 191 tonnes now slated for sale on the open market, rather than by direct bid as it did when selling 200 tonnes to India in Nov. '09.

New York's SPDR Gold Trust – the world's largest Gold ETF, with more than 1100 tonnes of metal "backing" its shares – ended Wednesday with its holdings unchanged, back at the level of two weeks ago after showing a small rise last week.

Latest data from professional trade body the London Bullion Market Association shows the volume of wholesale dealing "loco London" slipping both by volume and value last month, down some 5% from Dec..

Allowing for the "netting effect" of how the LBMA figures are compiled, turnover through London's professional dealers likely averaged well over $66 billion per day, however – more than 5 times the notional value traded through New York's Comex Gold Futures contracts.

Silver transactions in London fell dramatically in Jan., the LBMA also reports. Daily turnover shrank by one-fifth to the lowest level in six-and-a-half years.

Looking ahead for 2010, "Tightening physical fundamentals are projected to play an increasing significant role in setting prices," reckons a new report from BMO Capital Markets, part of the $360-billion BMO financial services group.

"The [silver] sector is projected to operate near capacity, which is consistent with $18-$20 an ounce marginal cost of production."

Silver prices in London on Thursday held above yesterday's 1-week low at $15.67 an ounce.

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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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