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Gold Struggles at $900 as Stocks, Bonds & Oil Ignore Sharpest US Recession Since WWII, But Scrap Flows Now "Limited, Exhausted"

Gold Prices spiked at the Wall Street opening on Wednesday, unwinding half of this week's losses to date as new data showed the US economy shrinking at its fastest pace in six decades.

The bounce soon faded, however, knocking the Gold Price back to $898.50 per ounce by the PM Fix here in London, as world stock markets pushed higher towards 10-week highs.

Government bonds also rose ahead of today's US interest-rate decision, pushing yields lower for new investors.

"Despite a short-term rally higher," says Michael Hewson in a technical analysis for Digitallook, "gold continues to find progress above $900 extremely difficult to sustain.

"For now it seems to be trading in a range between the 200- and 50-day moving averages [$850 and $920], with no clear direction one way or the other."

Versus the US Dollar, pretty much all asset prices besides gold and Gold Futures rose Wednesday morning, with crude oil touching $51 per barrel as the broad commodity markets ticked higher and the European single currency approached a two-week high above $1.3250.

Measured in nominal dollars, US economic output fell at an annualized pace of 4.7% in the six months ending April 1st, the Bureau for Economic Analysis (BEA) said today, the worst rate since 1949.

Adjusted for inflation, the rate of contraction was worse again, showing the sharpest fall since 1946 at 6.2% annualized and equalling the recession of 1974-75 in length with three consecutive quarters of shrinkage.

Price pressures meantime pulled in two directions, with the BEA's data showing all prices across the US economy, including imports, falling 1.0% annually. Domestically-produced goods and services, however, rose 2.9% in price.

Due to announce its monetary policy for the coming month at 13:15 EST on Wednesday, the Federal Reserve has held US interest rates at a record low beneath 0.25% for the last four months running.

Advising traders not to "pre-judge" next week's rate decision from the European Central Bank – widely expected to see a new all-time interest-rate cut to below 1.0% – ECB policy-maker Lorenzo Bini Smaghi told Bloomberg overnight that Quantitative Easing such as the central banks of Japan, Switzerland, the UK and US have undertaken "would make sense only when the interest rate is at zero or very close to zero."

New data today showed European bank lending falling once more in March, while consumer expectations are now for retail prices to drop, an ECB survey said.

"The hard lending data shows that the ECB is facing a deflation problem and will have to act more aggressively," reckons James Nixon at SocGen in London.

Meantime in India, traditionally the world's No.1 source of gold demand but a net exporter during the first 3 months of 2009, "Sales indications from the recent Akshaya Thritiya festival were disappointing," notes London dealer Mitsui in its latest Refining Monitor, "and are estimated to be some 20-40% below last year's volumes, based on a higher Rupee gold price and the  economic circumstances that currently prevail."

Akshaya Thrithya, the Hindu festival celebrating eternity which fell on Monday this week, is typically marked across southern India as an auspicious occasion for Buying Gold, that near-indestructible store of wealth.

But "Although the number of people visiting jewelry shops is encouraging, volumes of gold sold is not great," says Daman Prakash of MNC Bullion in Chennai to Dow Jones Newswires, "people were buying earrings where earlier they would have gone in for chains or necklaces."

His sales this season fell 40% from Akshaya Thrithya 2008.

Following the record Gold Scrap Sales of early 2009, however, "We expect that physical demand will provide a price floor at $850," says Mitsui, "particularly in an environment of [newly] limited scrap flows."

After out-pacing investment Gold ETF flows by 2-to-1 between Jan. and March, explains the dealer in its latest report – which also shows the strongest sentiment rating amongst refining businesses in 5 months – "It has now become very apparent that the traditional physical 'hubs' have exhausted the level of scrap quantities that were evident during Q1.

"If gold attempts to move higher from here, the metal will not be fighting a similar tide of excess scrap supplies as has been the case for much of this year."

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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