Gold News

Gold "set to rise" as financial markets remain spooked by subprime fears

Spot Gold Prices traded in a $2 range early Monday, dipping below $672 per ounce in Asia before regaining Friday's three-week closing high in London.

The US markets will be closed today for the Labor Day holiday, but analysts expect volatility in equity and corporate bond markets to continue in Sept.

"This is going to be a busy autumn," says John Dizard in today's Financial Times. "Snapback rallies will destroy your short [equity] positions, and unexpected writedowns will shatter rock-solid value plays turning them into sand."

(What might autumn 2007 hold in store for gold investors? Click here to read on...)

"In Asia the gold market is primarily driven by physical buying and physical demand has slowed down at this price level," said Ellison Chu at Standard Bank Asia in Hong Kong to Bloomberg overnight.

India's gold demand is set to rise strongly this month – perhaps up to 50% above last year's levels, according to the World Gold Council – but "overall trading has been very quiet [on Monday] and is likely to stay this way for the rest of the day as the US is closed," noted Chu.

Spot Gold Prices against non-US currencies were mixed, with the Yen price of gold rising slightly as the Japanese currency slipped to ¥116 per Dollar. Gold Priced in Euros dipped 0.3% to €492.50 per ounce.

For British investors wanting to Buy Gold Today the mid-price began Monday in London at £333.50 – gold's highest weekly opening since May. The Sterling Price of Gold then dipped as the Pound rose following news that British manufacturing grew faster than expected in August.

Falling interest rates tend to be good for gold if inflation doesn't also receded, and yields on ten-year UK government bonds rose one point this morning to 5.05%. They began last week however at 5.09%, and started July at 5.43%, while US Treasury bond yields dropped faster in Aug. than at any time since the 9/11 attacks.

Simply put, investors are betting the Federal Reserve will slash US interest rates to protect the financial markets. Given the huge gap between short-dated bond yields and the current Fed funds rate, a reduction in Dollar borrowing costs when the Fed meets on Sept. 18th looks assured. (Click here for a full report on the US government's latest "subprime" rescue plan...)

"I don't think the subprime problem has been resolved and the market's concerns stay, but the US president and the Fed clearly relieved the market [on Friday], which helped lift gold," says Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo.

"We've seen volatility in financial markets, but investors are aware of the fact that gold has been solid during the time, so they are willing to buy gold on dips."

Japanese gold futures for Aug. '08 delivery rose 0.6% at the Tocom today, while the Nikkei stock-market index dropped another 0.3%. It ended Monday's session more than 4% off its starting level of Jan. this year, following news that capital expenditure by Japanese corporations fell sharply – down by nearly 5% against the rise forecast by Tokyo analysts – between April and June.

Looking ahead, this week brings European economic growth and US manufacturing data tomorrow (Tues). Interest-rate decisions are then due from the Bank of England and the European Central Bank in Frankfurt on Thursday. After signaling further hikes to dampen consumer-price inflation earlier this summer, neither central bank is now expected to alter their current rates for fear of stalling a recovery in financial markets.

Seventeen out of 32 professional gold dealers and analysts surveyed by Bloomberg News forecast a third week of rising gold prices. Only four advised Selling Gold after it rose 2.8% last week. Eleven analysts were neutral.

The Bloomberg survey has proven accurate 61% of the time over the last three years.

Global wheat prices meantime reached a fresh record high on reports that Russia, the world's fifth-largest wheat exporter, may introduce a sales tariff to curb overseas shipments. Wheat prices in Chicago rose 25% in Aug., as India and Egypt moved to stockpile supplies ahead of what's set to be a very poor harvest.

Crude oil prices also rose this morning, nearing a four-week high after Hurricane Felix – now heading for the southern Gulf of Mexico – was upgraded to "Category Five", the strongest rating possible.

In the gold mining sector, South Africa's largest producers finally signed a new wage agreement with the country's three largest mining unions, providing for pay increases of up to 8.5%. Short-term, gold prices may react to a strike at the huge Lihir mine in Papua New Guinea.

"The strike in Papua New Guinea is not expected to affect global supplies," said one analyst to Reuters, "but in the current sentiment, the gold market is more sensitive to this kind of bullish news."

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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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