Gold News

Gold dips, but "no reason to sell" as forecasts raised & bonds hit by inflation fears

Gold Prices ticked lower into the US open on Monday, dipping nearly $4 per ounce from their overnight high to start the week just above $732.

Gold still began the week in New York more than 2.3% higher from last Monday. "[It] finished last week at the highest level since the first quarter of 1980 when it reached $875," as Christopher Langguth notes in a technical analysis for Mitsui today.

"The primary focus is on a reason to sell and right now there is none."

Goldman Sachs today raised its forecast for Gold Prices in the spot market, targeting $775 within the next three months from the previous estimate of $715.

"We believe the $50 per ounce rally since Sept. 6 has reflected both a return to fair value and at the same time an increase in fair value as the Dollar has weakened substantially," says the investment bank today.

"Moreover, we believe that gold continues to gain support from the structural realignment in the relationship between gold and the US Dollar, driven mainly by rising consumer and central bank demand in the rapidly growing emerging markets."

In the equities market, Asian stocks ended the day more than 1.4% higher on average, despite Tokyo being closed for a Japanese holiday. European stocks were flat by early afternoon, while Wall Street opened marginally higher.

US Treasury bonds continued to drop out at longer-dated – and therefore more inflation sensitive – end. Ten-year yields ticked up to 4.64% as US trading began Monday.

"Twenty-four of 30 traders, investors and analysts surveyed by Bloomberg from Sydney to Chicago on Sept. 20 and Sept. 21 advised Buying Gold," reported the newswire this morning. But it cautions that gold "might be poised to fall" as the volume of derivatives betting in Comex gold futures has risen sharply.

Now above 400,000 contracts, "open interest" in the Comex gold futures market may rise by another 20,000 contracts tomorrow, when the Oct. contract expires.

"This bulging gold open interest means a lot of institutions are long and at some point if they want to take profits you could have a good correction," says George Gero of RBC Capital Markets.

But "without doubt," counters Wolfgang Wrzesniok in the latest weekly research for Heraeus, the German refinery group. "the present overall environment, including the fundamentals, speaks more positively for gold than last year's price increase, which was primarily driven by speculators.

"This time, despite the high prices, a dramatic fall in demand is not to be expected. For the moment the mining companies are only waiting for dips to buy back more of their old hedges, while demand from longer-term investors (despite all day-to-day volatility in turn-over) continues to hold nicely. This latter is reflected in the increased demand for bars as well as for the physical-backed exchange-traded funds."

In the foreign exchange markets, the European single currency pulled back from a fresh lifetime high against the Dollar above $1.4110 as the political row between Frankfurt and Paris over Eurozone interest rates intensified.

Henri Guaino, a close aide to French president Nicholas Sarkozy, said at the weekend that the Euro's strength was eroding the region's competitiveness. Echoing Sarkozy's electioneering of earlier this year, the French government can not "stay silent in the face of this absurdity" he told reporters.

But the head of the European Central Bank, Jean-Claude Trichet, deflected this criticism by pointing to the "no change" decision made by the ECB at its last interest-rate meeting. Trichet had earlier signalled that Euro rates were certain to rise. But that was before the "credit crunch" began to bite.

"[Sarkozy] will fail" according to Alan Greenspan, former chair of the US Federal Reserve. With Eurozone consumer-price inflation still at the upper-end of the ECB's comfort zone, "he doesn't have any leverage."

What's more, the Gold Price in Euros last week hit a new 16-month high above €524 per ounce. History says it's warning that inflation in the region remains a serious threat. Broad money supply growth has been "steeply accelerated" by the European Central Bank's record cash injections to the credit markets since August, taking the rate of expansion "most probably close to 14%" according to analysis by Paul Vreymans at the Work For All think tank.

"That is three times the agreed and repeatedly confirmed target of 4.5% money-supply growth."

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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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