Gold News

Gold Drops Hard Alongside Stocks, Oil & Euros as Bondholders Await "Trick or Treat" from the Fed

Gold Prices on Monday failed to recover from a sharp drop overnight, sinking below $752 per ounce for the first time in a week to cap a run of eight weekly gains in nine.

Crude oil prices also fell hard, losing almost $5 per barrel from last Thursday's new record highs.

Global stock markets sank alongside, while the US Dollar suddenly spiked higher from new historic lows after the Japanese Yen had earlier gained 1.2% in response to the G7 summit in Washington that ended on Saturday.

"Investors are selling gold to pay margins on their equities," reckons Bernard Sin at MKS Finance in Geneva.

"The Gold Market needs a correction. It is very long at the moment."

Racing earlier to a near 6-week high vs. the Dollar in Asian trade, the Yen acted as a proxy for the Chinese Yuan after the "group of seven" developed-world leaders said it wanted Beijing "to allow an accelerated appreciation of its effective exchange rate".

The Japanese Yen is the most heavily traded Asian currency, while the Chinese Yuan remains fixed to the US Dollar and a basket of other major currencies, albeit inside a "flexible" band that lets it rise 0.5% each day.

The People's Bank of China raised that daily limit from 0.3% in May. Countering the G7 statement at the weekend, the central bank said that "moving the exchange rates in the absence of economic restructuring policies will hurt China."

Back in the Gold Market, spot prices dropped more than $20 per ounce between the Asian opening and midday in London, undoing all of last week's gains as the Yen shot higher in Tokyo trade.

The Nikkei stock index dropped 2.2% to reach a four-week low, while Japanese government bonds rose for the fifth session running, putting in their best performance since July.

Gold futures traded in Tokyo dropped more than 1.8% for the session. The Aug. '08 contract ended Monday's session equal to $770.43 per ounce.

"You can say everything is still positive for gold," reckons Ronald Leung, head of Lee Cheong Gold Dealers in Hong Kong, speaking to Reuters. "There's light buying on the physical side.

"I think $750 to $752 should be the support. Resistance is at $770. People are still on the bullish side and happy to buy."

Here in London, the FTSE100 index began the week 114 points lower, gapping down at the open as the 300 biggest stocks in Europe dropped 1.4% on average, adding to last week's 2.3% loss.

Earlier on the currency markets the British Pound had spiked to a new 26-year high above $2.0550, while the Euro recorded new all-time highs vs. the Dollar above $1.4340.

That amplified the pull-back in gold for European investors wanting to Buy Gold Today, and Gold Priced in Sterling slipped almost 0.9% by the time London opened.

Gold Priced in Euros dropped to a one-week low below €530 per ounce.

"We are playing catch up with the US," reckoned David Buik of Cantor Index when he spoke to Reuters about the European stock market today.

"It was ludicrous to think early last week that credit conditions were getting easier. We got terrible results from Citigroup, Wachovia and Bank of America."

Almost one-third of the 500 companies in Wall Street's S&P index will report their third-quarter results this week. Out of 131 companies reporting so far, says Reuters, more than 25% have missed analyst forecasts.

On Friday, US stocks suffered their worst day in two months. The futures market now puts the chance of a cut in US interest rates at 98%, up from just 32% at the start of last week.

There is little economic data due before the Fed's next meeting, with only jobless and new-home sales figures this Thursday. But a sharp cut to Dollar interest rates when the Federal Reserve meets on Halloween (Weds 31st Oct) would prove both "trick and treat" for bond investors.

The first rate-cut in this new cycle sparked a 5.2% drop in the Dollar's trade-weighted index since mid-August, plus an 18% rally in world Gold Prices. The accompanying rally in US government bonds – which tend to rise as interest rates fall – has flatly ignored the loss of purchasing power that Dollar-denominated bonds are suffering.

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"Obviously there is a limit to the extent that [US] obligations to foreigners can reach," said Alan Greenspan, former chairman of the Fed, in a speech on Saturday.

The Dollar's current historic lows may be "an indication America is approaching this limit," he added, failing to note his own role in creating nearly $9 trillion now outstanding in US government obligations.

Foreign investors already look sick of the Dollar's ongoing plunge, dumping $163 billion of US assets in August alone. Yet the price of two-year US Treasury bonds has shot higher regardless, pushing the yield offered to new buyers down to a two-year low.

Ten-year US bonds now yield less than 4.39%, down from 5.30% at the start of June.

In short, Western investment funds and institutions are buying government debt even as America's largest creditors in Asia are trying to quit their positions. And meantime, the loss of Dollar-purchasing power is NOT being countered by higher interest rates.

The last time Dollar-bond holders were destroyed by low interest rates, back at the end of the 1970s, investors fled into the "safe haven" of gold – and Gold Prices rose more than 8-fold inside three years.

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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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