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Gold Jumps Above $800 as US Foreclosures Beg for 'Hope Now'; Chinese Gold Demand Surges, But Can Output Keep Up?

Gold Prices leapt at the New York open on Thursday, rising 2.3% to close London trade near a one-week high of $804 per ounce on news that the rate of US home foreclosures hit a record high this summer, the second record quarter on the run.

The Mortgage Bankers Association said that 0.78% of all US mortgages went into foreclosure proceedings between July and Oct., beating the previous record of 0.65% set between April and July.

The number of US home-buyers now behind with one monthly payment or more also rose, up to the highest rate since 1986 at 5.59%.

President Bush is expected to confirm the 'Hope Now' package of bail-out measures in a speech later today.

Gold also jumped to a seven-session high for British investors today after the Bank of England cut UK interest rates for the first time in two years, knocking the Pound to an 11-week low.

The Bank's move – driven by "deteriorated" financial markets and "a tightening in the supply of credit," according to the BoE's statement – helped the Gold Price in Sterling reach £396 per ounce by the time London closed for business.

The European Central Bank meantime kept its rates on hold today, confirming the guess of fixed-income traders who had sold German bunds lower Thursday morning.

The Euro itself had earlier slid to a one-month low of $1.4525, helping Gold Priced in Euros hold above Monday's low at €540 per ounce, before jumping on the weak US housing data to $1.4650.

Asian stock markets had ended the day 1.6% higher, but European shares gave back early gains to trade near flat by their close. US Treasury bonds also fell, pushing yields higher as investors awaited full details of the Bush Administration's Hope Now plan to rescue subprime home-buyers, due at 13:40 EST.

"This backup in yields is attributable to more details on the Bush Hope Now plan," said Adam MacKillop, a bond-trader for Barclays Capital in Tokyo.

"It's a knee-jerk reaction for equities. There's hope, and that's negative for Treasuries generally." (How much hope does Hope Now offer? Learn more here...)

Broad-based commodity indices slid alongside bond prices early this morning, with "falling crude oil prices putting pressure on soybeans and corn" for biofuel production, according to a Japanese trader interviewed by Bloomberg.

"The Dollar's recent strength may also discourage buying interest in commodities," he added.

Zinc futures traded in Shanghai also fell, and copper wiped out an early 1.1% gain to stand 0.4% lower for the session after the People's Bank of China said it will shift from a "prudent" to "tight" monetary stance in 2008 – potentially denting demand for construction materials.

But raising Chinese interest rates six times in 2007 failed to stop the economy growing by 11% annualized. Inflation in the cost of living ran at 4.4% annually in October. New lending by private banks has risen by more than 15% so far this year.

"We believe the language of 'tight monetary policy' used at this conference is merely a retroactive endorsement of what has already been implemented," reckons Jun Ma, chief China economist for Deutsche Bank.

"It simply means that official policy statements sometimes are backward looking...and serve more of a function of political hedge than initiating further policy changes."

China's booming economy has led to a surge in Gold Buying by private consumers and investors, the GFMS consultancy said yesterday. Demand for gold jewelry is set to rise by one-fifth for 2007 as a whole – and "China is poised to become the world's second largest jewelry market for gold this year," says Philip Klapwijk, executive chairman of GFMS, "overtaking the United States and coming in No.2 behind India."

"I would expect it to grow further in 2008."

Disposable household income in urban China rose 13.2% between Jan. and Sept., led by the stock market and property boom.

"More economic development in China and a relatively higher savings ratio than that of India should in the long-term drive gold demand in China," reckons Stephan Schlatter, head of metals in Asia for UBS.

China's domestic gold-mining production also rose strongly during the first nine months of this year, according to analysis by Surbiton Associates in Melbourne, Australia, released this week.

Reaching 191.5 tonnes of Gold Bullion, China's output overtook the United States and was only just behind South Africa, the world No.1, where annual gold-mining production has now halved in the last decade.

Yesterday brought news that DRD Gold – South Africa's fourth-largest producer – will suffer a 15% drop in gold output this quarter following an accident. Tuesday saw a one-day strike by almost 250,000 miners in South Africa in protest against what the National Union of Mineworkers calls "mining genocide".

Mining-related deaths now total 201 for this year so far, worse than 2006 and on track to equal 2005. Fatalities in South Africa's mining sector have fallen by 56% as gold output has halved since 1996, but the industry was hoping to cut that number by a further 20% by 2013.

China is also suffering a wave of mining-related accidents, however, with up to 96 coal miners feared dead this morning after an explosion in the northern province of Shanxi.

The surge in Chinese gold production could also reverse sharply by 2013 according to a leading industry figure today.

"It's urgent for Chinese companies to develop gold mines overseas," said Ren Guangzhi, investment manager at Zijin Mining Group, owner of China's biggest gold mine, in Shanghai.

Unless new deposits are found and developed soon, he believes China's reserves – including gold-only mines producing 200 tonnes per year – could run out within six years.

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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.

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