Gold News

Gold ends London unchanged as South African output falls

The spot gold market ended the day in London little changed on Monday after dipping below $650 per ounce for the sixth time in three weeks at the US open.

For British investors wanting to buy gold today, the spot market closed the London session just shy of £327 per ounce, some 1.7% below last Monday's opening. Gold priced in Pounds Sterling had earlier slipped to a new 5-month low of £325.60 per ounce as the Pound spiked above the Two-Dollar mark on the currency markets for the first time since late April.

Tokyo gold futures for delivery in April '08 ended ¥3 higher per gram, giving back earlier gains as the Yen bounced on the forex markets to finish at the equivalent of $661.32 per ounce. Gold priced in Euros was little changed at €484 per ounce as the single European currency pulled back to $1.3440 on the forex market.

"The gold market's prospects depend on the currency market," said Hitoshi Inagawa, a senior manager at Yutaka Shoji in Tokyo earlier to Reuters. "The price of cash gold doesn't seem to have a clear direction."

On the mining supply side of the gold market, meantime, gold exports from South Africa – expected to be the world's No.1 producer nation in 2007, just ahead of Australia, the US and China – continue to shrink. They fell 9.5% in the first quarter of 2007, according to the Reserve Bank's latest quarterly bulletin.

"The gold mining industry faced various challenges in the opening months of 2007," says the RBSA – and with total South African output falling by one half over the last 10 years, those challenges persist, with strike action now looming over a 15% wage claim from the National Union of Mineworkers.

Costs of production keep rising for gold mining companies globally, in fact, with Harmony Gold – the world's fifth largest gold mining company – only set to break-even on its operations in Australia according to CEO, Bernard Swanepoel. Speaking on the Moneyweb Power Hour on South African radio last Friday, "the thing in Australia, the nature of the mines, is that they don't actually have such bad cash costs," said Swanepoel.

"But for every Rand you make you really need to spend 99 cents to make the next Rand."

Fellow South African gold-mining firm Gold Fields said today that its Choco 10 mine in Venezuela would produce 2,200 fewer ounces this quarter than forecast – a drop of more than one quarter – owing to strike action earlier this month.

Turning to physical gold demand, German refining group Heraeus now sees sales to Asian jewelers remaining weak until the end of the summer. "We do not expect the business to pick up dramatically unless prices drop significantly," writes Wolfgang Wrzesniok in the refiner's latest metals report.

But the latest Refining Monitor report from Mitsui disagrees, saying that "in recent weeks as gold ran into significant pressure from macroeconomic forces, physical buying in Turkey, Dubai and India has provided support to the market.

"In particular, despite the end of the wedding season in India, gold demand has re-emerged at lower prices where $650 remains a key level. Refineries are optimistic and it remains to be seen if physical gold demand can provide sufficient support to the market in the short term."

Investment demand for gold bullion last week added 1.5 tonnes to the gold held in trust by StreetTracks GLD, the world's largest exchange-traded gold fund. Total assets at GLD, however, remain 5% off their top of 500 tonnes recorded two months ago.

Investors trying to second-guess the direction of US interest rates ahead of Wednesday's announcement from the Federal Reserve gained few clues from today's US housing market data. The number of existing homes sold in May came in right on analysts expectations, and was little changed from April's figure.

But "we are a long way from any rebound in housing," reckons Mike Englund, chief economist at Action Economics in Boulder, Colorado. "Surging mortgage rates will likely extend the housing sector weakness through the third quarter," he believes.

The subprime end of the US mortgage market meantime continues to spook Wall Street's biggest investment banks. Now politicians in Washington are set to scrutinize the most high-profile problems. The liquidation of two hedge funds at Bear Stearns – the largest issuer of subprime US mortgage debt in 2006 – will be studied by the House Financial Services Committee on Tuesday.

The US financial watchdog, the Securities and Exchange Commission, will also testify at the hearings. Concern is growing that the leading credit-ratings agencies may be blamed for lower-risk investors buying higher-risk MBS and CDO bonds.

"The rating agencies are downgrading securities after the fact and not providing the market with the right cues for comparability and valuation of assets," says Joshua Rosner of investment research firm Graham Fisher & Co. in New York. Last month he published a report warning that the major ratings agencies were over-stating the safety of many new bonds backed by subprime mortgages.

Now the blow-up at Bear Stearns – which has been forced to put $3.2 billion at risk to bail out one of the hedge funds – has exposed the risks hidden in today's complex debt markets.

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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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