Gold News

Gold Slips with Stock Market, Connection with Euro Weakens; Chinese Households Buying as Western Consumers Sell

The price of Gold fell to a one-week low against the US Dollar on Thursday morning in London, trading at $984 an ounce as European stock markets also fell for the first time in six days.

"After six up days it looks like we finally ran into sellers," says one bullion bank, Scotia Mocatta, in a technical note to clients.

"It will be interesting to see if [Gold] revisits the former resistance line at $975 [but] this is only the first down day, so we do not expect larger selling unless $965 breaks."

Meantime, "Resistance to a sustainable move above $1,000 remains strong," says the South African Standard Bank.

"What makes the resistance even more remarkable is that gold has failed to move higher despite the Dollar falling almost 1% against the Euro yesterday."

On a daily basis, the value of Euros and gold typically move together versus the US Dollar, showing an average correlation since the start of this decade of +0.50. It would stand at +1.0 if they moved precisely together in lock-step each day.

Today the Gold Price in Euros slipped below €680 an ounce for the first time in six sessions.

"The potential for US Dollar weakness is among the most compelling factors supporting the rally," says James Steel, metals analyst at HSBC, in a client note.

"The traditional inverse relationship between gold and the US Dollar appears to have been re-established during the current gold rally,"

Gold's correlation with the Euro, though strong, has in fact slipped lower since last week's sharp jump towards 18-month highs vs. the Dollar, falling to +0.67 from August's daily average of +0.91.

In contrast, the metal's correlation with major stock markets – particularly London's FTSE100 – has risen so far this month, averaging +0.64 from August's +0.16.

Investors are now Buying Gold to defend against potential inflation, reckons Stephen Briggs at RBS, also in London. "Gold's long-term history as a harbinger of inflation, or gauge of inflation expectations, is clear."

But gold's recent sharp rise against all major currencies came as the world's No.1 Gold Mining group, Barrick Mining, bought a huge quantity of metal in the open market to cover forward sales it had already agreed, notes Virtual Metals analyst Matthew Turner, speaking to Dow Jones Newswires.

Between the start of July and Monday this week, Barrick bought nearly 75 tonnes of gold as it finally began closing its "hedge book" after 21 years of selling gold forward in anticipation of lower prices.

Meantime on the monetary policy front today, the Bank of England voted to keep UK interest rates unchanged at their record low of 0.5%. The Old Lady is also pressing ahead with her £175 billion program ($290bn) of Quantitative Easing, through which she has already bought government bonds equal to this year's entire new gilt sales to date.

Over in China – world No.1 for private Gold Buying between Jan. and July, overtaking India with 195 tonnes of physical demand – the nation's largest bank said yesterday it's launching a special precious metals division to help meet this huge and steadily growing market.

"With China's rising affluent population, its gold market has been expanding at a rapid pace, and we believe it still has huge potential to grow," said Industrial & Commercial Bank of China (ICBC).

Analysis from BullionVault shows Chinese households grew new gold purchases from 1.0% in 1998 to 1.8% of their annual savings last year. (Read more about China's Galloping Gold Consumption here...)

"The Chinese continue to have a custom keeping gold as personal wealth," says ICBC.

In the UK and US, in contrast, cash-strapped consumers are selling gold in record numbers and often well below fair market values according to press reports today.

"It is probably the largest phenomenon the industry has seen since 1980 when people were queuing out the door to buy silver," says David Johnson of pawnbrokers Rex Johnson & Sons in the English Midlands, speaking to the Birmingham Post.

"In our Dudley shop they have been queuing out of the door since last February. It has escalated at the shop on Corporation Street [in central Birmingham]. We employed about eight people last February and now we have got about 50."

Complaints against dedicated gold-buying ventures have leapt, however, according to data from the Better Business Bureau, with price discrepancies featuring heavily.

"Not every internet gold buyer is dishonest," says one online jewelry buyer in a press release, citing one customer who was offered $310 for a package of gold items it then bought for $1,800.

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Adrian Ash

Adrian Ash, BullionVault Gold News

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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