Gold closes London at 9-week high on inflation fears; Dollar steady despite weak US data

Spot Gold Prices closed the London session above $675 per ounce on Thursday, their highest level since May 9th.

Priced in Euros Gold hit a one-month high above €489 per ounce and the metal also rose against the British Pound as both currencies failed to rise against the Dollar despite weak US economic data. Fixed at £329.21, the Sterling Price of Gold then rose further as the metal attracted investors in all major currencies.

Indeed, commodity prices rose across the board on Thursday, led by tin hitting an all-time high and notching up a 100% gain since the start of this year. Brent crude oil traded in London rose for the third session running to reach $77.34 per barrel.

With global food prices already up by 23% since the start of 2006 according to the International Monetary Fund – and the Baltic Dry index of shipping costs hitting a record high last week – inflationary pressures may continue to grow after Beijing today reported that China's economy grew by 11.9% annualized between April and June, a near-12 year high.

"The figures put China on course to chalk up its straight fifth year of double-digit growth," reports the Financial Times, "and to overtake Germany as the world's third-biggest economy – perhaps as soon as this year."

Overnight in Tokyo, gold futures for delivery in April '08 ended the day 0.7% higher against the Japanese Yen, closing at the equivalent of $677.10 per ounce. The Nikkei stock market index also rose, adding 0.6% for the day but remaining nearly 200 points shy of this year's peak at 18,116.

European stocks bounced higher as mining stocks rose alongside metal prices. By the London close the FTSE Eurofirst 300 index stood nearly 1% higher. Wall Street also gained after Continental Airlines surprised analysts with a 15% increase in quarterly earnings on the back of growing demand for trans-Atlantic flights.

Bank of America said that its earnings per share rose 7.5% in the second quarter, but the financial sector may suffer fresh jitters after a report in today's Wall Street Journal says the tax authorities are investigating the possibility that US hedge funds used complex credit derivatives to evade tax.

Earlier in the day, UK data had showed a sharp drop in the rate of broad M4 money supply growth, up just 0.8% in June from a rise of 1.2% in May. Retail sales also came in below expectations, but the real evidence of a slowdown in Western household consumption came from the United States.

The Leading Indicators report for June showed a decline of -0.3% against +0.2% expected. The Philadelphia Manufacturing index then came in at 9.2 versus 14.0 as forecast. The likelihood of lower Fed rates ahead was stymied, however, by a fall in initial jobless claims that helped push the 10-year US Treasury bond yield up 4 points to 5.05%.

"It doesn't look like gold is going to sell off to a great extent in the near term," reckons George Gero at RBC Capital Markets, "no matter what.

"Everywhere you look in the world, it's a new minefield geopolitically [and] people who are concerned about holdings in dollars are diversifying generally into gold."

Japanese investors will be able to track the Gold Price – if not actually own any metal themselves – when Osaka's stock exchange launches the country's first exhange-traded gold fund next month. StreetTracks GLD, largest of the world's existing gold ETFs, reported yesterday that the physical gold it holds in trust on behalf of investors tracking the gold price via the stock market has grown by nearly 5% in the last two weeks.

"We certainly had a flight to safety Wednesday," says Bill O'Neill of Logic Advisors in California to Reuters, "and for a change, gold did attract some of that demand. A lot of it is related to the subprime issue."

Chairman of the US Federal Reserve Ben Bernanke continued his two-day testimony to the US Congress. "Bernanke's speech [Weds] indicated that even though inflationary pressures were the Fed's primary focus, issues in the housing sector may weigh on US economic recovery," said Brandon Lloyd in today's gold note from Mitsui.

"Now both the technical & fundamental schools of thought support a move higher in gold with $685 trend line resistance the next target."

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