Gold News

Gold Breaks 7-Week High as Dollar Falls, World Economy Sinks; Correlation with Equities Turns Negative

The Gold Price rose sharply at the US opening on Wednesday, breaking through the four-day ceiling at $932 an ounce to reach new 7-week highs as US stock markets also jumped despite a flood of record-bad economic data.

The Gold Price struggled to hold £600 or €680 for UK and Euro investors, however, as the US Dollar fell hard on the currency markets.

"After having had a positive correlation with equities for some time now, the correlation between gold and the S&P has turned negative again," noted Walter de Wet at Standard Bank this morning, reviewing recent price action.

Analysis from BullionVault shows that gold's correlation with the US stock market has been zero on average across the last 38 years. It turned sharply negative – meaning gold rose as stocks fell, and vice versa – throughout 2008.

"We would [now] look for gold to move higher," says de Wet, "on any sign of a correction lower in equity markets."

March's collapse in the S&P to 12-year lows came as world Gold Investment demand surged to new record levels, according to the latest analysis from industry-marketing group the World Gold Council.

Based on data from the GFMS consultancy, today's Gold Demand Trends shows total world gold demand – including industrial and jewelry buying, as well as investment – jumping 38% in tonnage terms between Jan. and April, compared with the first quarter of 2008.

Indian gold jewelry demand fell 52%, however, and only two non-Western markets grew their Gold Investment demand compared with the start of 2008 – China and Hong Kong.

Chinese jewelry demand also rose, up 3% by Dollar-value.

"Certainly over the long run, you're going to see China permanently taking a bigger role," says Rozanna Wozniak, an investment-management and advisor to the World Gold Council.

"Throughout the Western world, the safe-haven motive to Buy Gold was very strong due to economic uncertainty."

In Germany, where demand for Gold Coins and bars rose five times over, "it also appears to be motivated by inflation," she believes.

New data released today however showed Germany factory-gate prices dropping 1.4% in April from March.

World trade volumes fell at the fastest pace on record during the first quarter of '09, said the Netherlands Bureau for Economic Policy Analysis, shrinking a further 11% from the 6% contraction seen at the end of 2008.

Global sales of mobile cell phones fell 9.4%, according to research firm Gartner, while Deere & Co. – the world's No.1 maker of tractors and agricultural machinery – saw its first-quarter earnings fall by 38%.

Japan meantime suffered its worst economic contraction on record, shrinking at an annualized pace of 15.2% between Jan. and the end of March as exports collapsed.

Domestically, department-store sales shrank by more than one-tenth last month alone, says the Japan Department Store Association.

"While we continue to favor an eventual break to new record highs, only when Gold holds clearly above $950 per ounce will bullish momentum kick in," reckons Nicole Elliott, a technical analyst at Japanese bank Mizuho's London office, in a report quoted by Bloomberg.

"This may be due to generalized US Dollar weakness, courtesy of US government largesse, rather than renewed appetite for precious metals."

Today the US Dollar Index fell for the first session in four, taking its overall loss from March's 3-year highs to 8.3%.

Crude oil crept further above $60 per barrel, while the Euro rose to a fresh one-week high near $1.37 and the British Pound broke $1.55 for the first time in 2009.

Yesterday the Federal Reserve added commercial real-estate mortgage bonds to the list of "legacy" investments it's willing to lend against under the Term Asset-Backed Securities Loan Facility (TALF).

The $700 billion CMBS market – which financed some 20% of outstanding US commercial property loans, but "came to a standstill in mid-2008" as the Fed puts it – rallied on the news.

Government bonds meantime held steady this morning, capping the annual yield offered by 10-year US Treasuries at 3.24%. But "We are close to the end of the rally in optimism and rising risk appetite," reckons Marius Daheim, senior bond strategist at Bayerische Landesbank in Munich.

Speaking to Bloomberg, he forecasts 10-year yields will retreat back beneath 3.0% within a month – the all-time low hit between Nov. and April as institutional investors fled equities for US government debt.

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.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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