Gold News

Gold Recovers Overnight Dip as Euro Rises, Subprime Home-Loans Downgraded; Florida State Stuck with Junk

Gold Prices recovered an overnight dip by lunchtime in London on Tuesday, trading above $794.75 per ounce as European stock markets stood 1% lower for the day.

Bond prices continued to push higher, while the Euro rose on the currency markets, gaining almost one cent from last night's two-week lows to the Dollar.

The single currency jumped to $1.4730 on news that Producer Price inflation in the Eurozone hit 3.3% per year in Oct., sharply above Sept.'s reading of 2.7% and beating analyst forecasts of 3.0%.

That move capped the Gold Price in Euros below €540 per ounce as crude oil prices fell by 1.1% ahead of tomorrow's meeting of the Opec oil cartel in Abu Dhabi.

"Opec will go ahead with a 500,000 barrel per day increase" in output, reckons Edward Meir at MF Global in Connecticut. "However, the decision will come down to the wire, and much will ride on where prices are."

More than half of the 42 oil analysts surveyed by Bloomberg News, however, believe Opec will delay raising output quotas now that prices have dropped almost 10% from last month's record peak near $100 per barrel.

Declassified analysis by the US National Intelligence Estimate claimed yesterday that Iran halted its nuclear weapons program in 2003, adding to the pressure on oil prices as traders cut its "war premium".

The Gold Market "seems to be trying to find support at $773" – last month's low – according to Robin Wilkin, head of technical analysis for J.P.Morgan's commodities & forex desk in London.

Looking at the Gold Price on February futures, "there are buy stops waiting at $807.00," says Christopher Langguth for Mitsui today, "and there are sell stops waiting at $780.00.

As it is, "the bull market has made no progress since 7 November. Those who close out their speculative positions are unlikely to return before January."

In Tokyo overnight, the Nikkei stock index dropped almost 1% of its value as the Japanese Yen pushed the Dollar down to ¥109.65 for a loss of 1.2% so far this week already.

Gold Market futures traded at the Tocom for delivery in Oct. '08 slipped one-third of a per cent against the Japanese currency, but ended the session slightly higher in Dollar terms at $801.60 per ounce.

"You've seen gold continue to track the US Dollar almost tit for tat for a good number of years, and certainly over the last week or so," reckons Wilkin at J.P.Morgan in London.

But with gold now 5% or more off its recent highs against all major currencies, retail sales may continue to pick up as jewelry buyers take advantage of this lull.

"Bits of buying are taking place," said one Indian gold dealer to Reuters in Rajkot today. "People are hoping that the Gold Price would fall to around 9,800 Rupees" per 10 grams – equal to $775 an ounce.

"At every dip, buyers are coming," said another dealer. "They are comfortable at prices below $800 an ounce."

Twelve months ago, the "comfort level" for Indian consumers Buying Gold was widely reported to sit below $600 per ounce, nearly 25% beneath today's prices.

Meantime in the bond market, US Treasury prices slipped as the New York opening drew near, pushing bond yields higher.

Treasuries with these yields are "not really attractive," notes Michael Markovic at Credit Suisse in Zurich. "We have to look at the fundamentals and these fundamentals indicate that this rally [in bond prices] has gone too far. This is putting a floor under how much further yields can fall."

US bond yields have collapsed since the start of June, taking the return offered to new buyers of two-year Treasuries down from 5.10% to just 2.86% last night.

Two-year US bond yields this morning ticked up 2.89%, but they remain well below consumer price inflation, last reported – officially – at 3.54%.

"As long as we can find fresh bad news on credit, which doesn't seem to be difficult at the moment, it's hard to see yields rising much above these levels," counters Marc Ostwald at Insinger de Beaufort in London – and despite the ever-growing inflation reported in Europe, two-year German bund yields slipped this morning to 3.75%, down 10 basis points from the week's opening on Monday.

Today's early news from the credit market included Moody's – the global ratings agency – downgrading 43 tranches of subprime-mortgage backed bonds issued by Merrill Lynch, saying that the collateral underpinning these bonds is "experiencing higher than anticipated rates of delinquency, foreclosure."

A Bloomberg report also claimed that Florida's state pension fund is holding "more than $1 billion of the same downgraded and defaulted debt that sparked a run on a state investment pool for local governments and forced officials to freeze withdrawals."

Education authorities and local town councils are currently locked out of $14 billion frozen by the Local Government Investment Pool. "A state-created home insurer and the treasury are also at risk," Bloomberg adds.

What goes up when falling bond yields crash into rising inflation? To get the Facts about Gold Investment Today – plus a free practice trading account with direct access to live Gold Prices – click through and register for Five Myths of the Gold Market here...

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.

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