Gold News

Gold Defies Short-Term Bears, "Prospects Strong" on Poor Monetary & Fiscal Policies

Gold Prices recovered from an early dip in London on Tuesday, trading above $1064 an ounce as the New York opening drew near, while global stock markets ticked lower from a new 2009 high on the MCSI World Index.

Trading above $80 per barrel, US crude oil also broke a fresh 2009 high, as did coffee and rubber prices.

Corn rose to a 3-month high on news of early frosts delaying the US harvest and reduced yields thanks to disease.

"We expected gold to push lower as there are still [jewelry] scrap flows coming to the market and buying interest remains little," reports Standard Bank today.

"But at the moment, the lack of buying in the physical market is overshadowed by investment interest on the back of a weaker Dollar."

Tuesday morning saw the US Dollar slip to fresh 14-months on its trade-weighted index. The British Pound rose sharply, capping the Gold Price in Sterling below £650 an ounce.

Eurozone investors now Ready to Buy  Gold saw the price touch a 3-day high at €713 an ounce.

"Physical demand for gold from jewelry clients, although generally light over the past six weeks, has been seen in good strength on corrections in the price," says John Reade, chief commodities analyst UBS in London.

India's current post-harvest festival season peaked last weekend with Diwali. Western jewelers are now expected to start re-stocking for Christmas.

Five weeks ago, Reade advised UBS clients to "take profits" because of the large bullish position built by speculative players in the Gold Futures market. That bullish position has since swollen by another 10%.

The Gold Price has gained a little over 5%.

"This type of [jewelry] buying will prove supportive for gold," says Reade in a client note, quoted by various newswires today, "although it would not help during a large-scale episode of deleveraging and position reduction" by leveraged speculators.

"Many speculators have rushed to jump on the bandwagon," agrees Eugen Weinberg at Commerzbank – which has repeatedly called for gold to fail above $1057 an ounce, the "top of a 38-year uptrend" starting at the Jan. 1980 high – but "an expanding minority of short-term oriented investors is betting on falling Gold Prices."

Longer term, "Gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely," said David Einhorn of Greenlight Capital Management in a speech to the Value Investing Conference in New York on Monday.

Einhorn famously bet against Lehman Brothers a year before it collapsed, citing its 30-to-one leverage as unsustainable.

In July this year, his funds switched a $390 million position in the SPDR Gold ETF Trust to owning physical Gold Bullion outright, citing lower storage costs.

"Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible," Einhorn told his audience in New York yesterday. "Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker's austerity."

"Gold should [now] do very well if there is a sovereign debt default or currency crisis."

Here in the UK, Bank of England governor Mervyn King is expected to comment on his policy of Quantitative Easing, currently financing the government's entire 2009 deficit, in a speech in Edinburgh this evening.

"As a rule of thumb, Mr, King makes about three significant policy speeches per year," notes Marc Ostwald at Monument Securities, "and it tends to be those that are made outside of London – rather than say the Mansion House Address or the like – that are significant."

Meantime in Chicago yesterday, the CME commodities futures exchange – which is in talks to buy rival platform the Chicago Board of Exchange (CBOE) – began accepting physical gold as collateral from its member firms.

Applying a 15% haircut on the market value of such deposits – held at J.P.Morgan in London – the CME estimates rolling costs of 0.05% per month to firms posting gold as collateral against their commodity trading positions.

"We're doing this in response to customers' wish to use their gold holdings more efficiently," said a CMA spokesman.

"It's going to start a whole range of exchanges using gold as collateral," said Deutsche Bank's head of metals trading, Raymond Key, to Bloomberg.

"Within the world of collateral, the mainstream products have been used for 20 to 30 years, and here we are talking about using a new asset."

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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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