Gold News

Gold Drops Another 2% as Oil Slides, Euro Falls; Investment Case "Strong" as US Recession Bites

Gold slumped another $18 at the London opening on Wednesday, falling to an eight-session low as crude oil slid yet again.

European equity markets turned sharply higher for the first time in a week, while bond prices fell on news of accelerating inflation in Germany – the Eurozone's largest single economy.

But despite fresh promises of "inflation vigilance" from both Axel Weber and Klaus Liebscher of the European Central Bank (ECB) yesterday, the Euro fell alongside Gold and crude oil this morning, falling to a one-week low of $1.5662.

That capped the slide in the Gold Price in Euros to 1.4% at €570 per ounce.

"The problem for metals is that they were holding too strongly to oil on the upside," said Rory McVeigh, a trader at Commerzbank to Thomson Reuters earlier.

"Now we're seeing some of that money coming out."

Ahead of today's US crude and gasoline stockpile report, oil futures repeated Tuesday's $3 losses, sliding below $127 per barrel as the British prime minister, Gordon Brown, met UK oil-company chiefs in Scotland to ask for increased daily output.

At the Morning Gold Fix – where London's five largest bullion dealers agree a benchmark price to clear their outstanding orders – one ounce of gold was priced at $892, down 2% from Tuesday and almost 13% below March's all-time top of $1,023.

"Gold continues to be vulnerable to movements in the USD and global inflation," note Camilla Sutton and Stephen Malyon at Scotia Mocatta, the precious metals dealer in London.

"Both helped to push gold above $900 over the last week [and] we expect these fundamental drivers to continue to put upward pressure on the metal."

But looking at the futures contracts held by speculative traders, "long positions now outweigh shorts 8:1," they add, "which leaves the metal vulnerable to a change in sentiment and could exaggerate any downside move."

Starting from a four-month low of $845 per ounce, the Gold Price had moved 10% higher in the three weeks to last Thursday. Just shy of the previous all-time high set in January 1980, that bottom came after gold touched a new record of $1,032 on March 17th.

"The effects of the sub-prime credit crisis continue to provide a strong Investment Case for Gold," said Philip Klapwijk of the widely-respected GFMS consultancy at a conference in Shanghai yesterday.

Fresh inflationary pressures, compounded by negative real rates of interest, will only put "an already weak dollar under further pressure" he explained, while new gold mining output and central bank gold sales will remain flat.

Klapwijk believes a Gold Price of $1,100 per ounce is very possible later this year.

Warren Buffett, the legendary "value" investor, believes the United States is "already in a recession...deeper and longer than many think."

Today brings the latest US mortgage applications data at 10:00 EST, plus durable goods orders.

"Home equity loans, which had been used in at least one of every nine deals when lenders were more generous, are no longer a source of easy money for many prospective buyers," reports the New York Times today.

"Used-car prices have fallen nearly 6% as repossessed cars and gas-guzzling trucks and SUV's flood auction lots."

Annual sales are set to fall more than 7% to a 13-year low in 2008, according to market research from J.D.Power & Associates.

US consumer confidence fell more than 8% in May on the Conference Board's index, reaching the worst level since 1993.

"We're at the beginning of the US recession," says Nouriel Roubini, professor of economics at NYU and head of the RGE Monitor.

"In my view this is not going to be a short and shallow recession. It's going to last 12 to 18 months for three reasons. The housing recession is getting worse, not bottoming out. So now we have a US consumer that is shopped out, saving less and debt burdened – and therefore [we'll see] a contraction of consumption, which is 70% of US demand.

"And three, the problems in the financial system go well beyond subprime mortgages – residential mortgages, commercial real estate, consumer credit, leveraged loans, corporate bonds, municipal bonds..."

Putting these three factors together, Roubini – who first announced a US recession in 2006 – believes "there is going to be a severe economic contraction."

"The high price of fuel is now finally affecting the man in the street," says Robert Laughlin, a broker at MF Global in London. "Global economies are creaking at present, with US, German and French consumer confidence data all at record lows."

But even as US consumers cut back on their driving this Memorial Day weekend, the Baltic Dry Shipping Index held near last-week's all-time highs – "suggesting resilient global demand will not slow enough to dampen oil prices significantly this year," as the RGE Monitor notes today.

"Historically, it took 4 years for US consumption to decline after the 1979 oil shock."

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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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