Gold News

Gold Sinks to Two-Week Low as Oil Falls; Bond Yields & Stocks Move in Sync Despite Rising US Inflation

Gold Prices fell more than $30 per ounce from its early high in the Asian session on Thursday, falling fast through Monday night's low at $792 to hit a two-week low of $785 after London closed for the day.

The move came as crude oil dropped another $1 per barrel to trade below $93 after data showed a surprise increase in US energy stockpiles, the first increase in four weeks. Gold also got whacked despite very mixed data for the US Dollar, still trading near record all-time lows on its trade-weighted index.

Consumer Price inflation in the United States rose to 3.5% in the year to Oct., said the Dept. of Labor today, up sharply from Sept.'s reading of 2.8% and suggesting a need for higher interest rates ahead.

But Jobless Claims in the world's largest economy also continued to rise last week, the Labor Dept. added, leading institutional investors to buy US Treasury bonds regardless of that surge in the cost of living.

Two-year US government bonds now yield less than the current CPI inflation rate at 3.45%, destroying wealth for current Treasury-bond holders. But government bonds worldwide continued to find a bid on Thursday as global stock markets fell yet again.

The S&P in New York has now lost 8% of its value since reaching a new all-time high at the start of October. The correlation between two-year US Treasury bond yields and the S&P index now stands at 0.90, according to Bloomberg data, compared with 0.55 at the beginning of this year.

"A figure of 1.0 would indicate they have moved in lockstep," as the newswire explains.

Back in the Gold Market, "The passage of the Indian religious and festival season as well as the upcoming Christmas season should slow demand for jewelry," reckons Tom Pawlicki, an analyst at MF Global in New York. "Gains in the remainder of this year will be limited or non-existent."

"We are seeing a lot of selling across the board," said Bernard Sin, a trader with Swiss refinery MKS Finance in Geneva, to Bloomberg. "We're at the highest price in 27 years; there is not a lot of upside potential."

"Continued weakening of the US Dollar, potentially leading to the unwinding of Bretton Woods II, is increasing the metal's credibility," says a note from RBC Capital Markets, currently hosting a gold conference in London.

The investment banking division of the Royal Bank of Canada, "RBC Capital Markets remains bullish on gold and gold equities for the medium-term," adds Stephen Walker, its director of mining research. "However, the bank's short-term outlook is more cautious."

Walker says a "significant correction" may now be on the cards, perhaps taking the Gold Price down to $750 or eve $725 per ounce.

"Bear in mind is that we are at 27-year highs and we may be seeing some short term profit taking to offset against stock market losses," agrees Ben Coleman, a trader at Tradindex, speaking to AFX Thomson.

But away from the sound and fury of the today's Gold Market action, the long-term outlook for gold buyers today remains strong according to Barrick Mining, the world's No.1 producer.

"Global mine supply is going to fall at a much faster rate than people generally believe," said Greg Wilkins, CEO of Barrick, at today's RBC conference here in London. "Many of the mines that people are anticipating bringing into production will either not come into production or will be on a much longer timeframe."

Just today, the world's fourth-largest gold mining company – Goldfields of South Africa – said that production at its Cerro Corono project in Peru will be delayed until July 2008, four months behind schedule.

Construction costs have leapt by 23% to $421 million.

Annual gold mining output in South Africa, meantime, the world's largest producer nation, has now halved since 1997. "Last year we killed nearly 200 people" in mining that gold, says Sietse van der Woude, an advisor to South Africa's Chamber of Mines.

"A 100 years ago people would have thought that an excellent rate. In ten years’ time we’ll look back and see that rate and we’ll be shocked."

Improving safety will only increase mining costs further, however. "The cost structure of the industry has substantially changed," Wilkins added in his speech today. "If we were to see a return to a $500 gold price, I think the industry will be in serious trouble."

As for the current volatility in Gold Prices, "just because of the trading nature of gold and the new [financial] regime that we are in now, I would say that it could easily move to $900...$1,000...or beyond," Wilkins told the RBC conference in London.

"It could happen very quickly."

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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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