Gold News

Gold Rally Fades, Euro Correlation Sinks, But Indian & Chinese Gold Buying "Strong"

Gold reversed a 1.0% rally Thursday lunchtime in London, dropping back to $1161 an ounce as European stock markets rose, commodities trod water, and the US Dollar slipped to new multi-month lows.

Silver Prices struggled above $17.50 an ounce. US Treasury bonds slipped, nudging the 10-year yield back up to 3.00%.

"Gold Prices were well supported" in Asian trade overnight, says a Hong Kong dealer, following what Scotia Mocatta analysts called "trendless trading...an opportunity for consolidation."

"Demand in India has been quite strong over the past three days," says a London brokerage, after this week's 2.2% drop in the Dollar price – plus the second hike in India's official interest rate this month – knocked the Rupee price down to an 11-week low.

The world's heaviest gold-consumer market, India typically sees strong buying as the autumn festival season begins in Sept.

Gold imports to India – which has almost zero domestic Gold Mining output – fell by 40% as prices surged to new record highs in the 3 months to end-June.

"Buying is definitely there. Traders, who bought 10 kilos a few days back, are now buying 40 kilograms," Reuters quotes a Kolkata trader.

"Our sales to India in July [were] five times greater than June," says UBS bank strategist Edel Tully.

"Our sales desk have not experienced a stronger two-day period since late January."

Western Gold Investment demand remained subdued on Thursday, however, after the giant SPDR Gold ETF trust reported its sharpest outflow since April, heading for its worst monthly contraction since Feb.

"Physical investment in the continental European market is very, very quiet," says German-refinery Heraeus' head of sales, Wolfgang Wrzesniok-Rossbach

Unlike the record volumes hit at the peak of the Greek debt crisis in May, "It is not a mass market at the moment," he says.

The Gold Price in Euros today fell to its lowest level since May 3rd as the single currency also hit a new 11-week high against the Dollar.

Gold and the Euro previously showed a strong, positive correlation against the US currency, but that connection has been severed throughout 2010.
 
On a rolling one-month basis, the correlation of daily changes in gold and the Euro fell to minus 0.86 on Wednesday, just shy of the record inverse correlation hit in mid-May.

That figure would read +1.0 if gold and the Euro moved together in lockstep, or minus 1.0 if they moved perfectly opposite.

The 10-year average to end-2009 was +0.60.

"It seems people are moving a bit out of gold," said Standard Chartered bank's head of commodities, Jeremy East, earlier this week.

"Financial meltdown and all the rest of it seems to be disappearing."

Physical Gold demand has however risen this week in China – the world's No.2 consumer – as well as India, another London dealer reports.

"Our Hong Kong office reports a rising premium on Shanghai gold," he says, above the Spot Gold price quoted by London's bullion banks.

"At current price levels, physical gold demand is supportive," agrees a note from BNP Paribas.

European stocks rose meantime Thursday, with London's FTSE100 hitting a 10-week high.

The Gold Price in Sterling slid to £743 an ounce, a new 3-month low, as the Pound extended this month's near-5% rise vs. the Dollar.

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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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