Gold News

Gold Dips as Stocks Plunge; Yen Surges as China Proxy, Bond Buyers Await "Trick AND Treat"

Spot Gold Prices failed to recover from a sharp overnight drop by the start of trade in London on Monday, starting the week below $760 per ounce.

The Gold Market had earlier dropped $12 per ounce during morning trade in Tokyo, as Asian stock markets sank – and government bond prices rose – on a sudden 1.2% rise in the Japanese Yen.

Racing to a near 6-week high against the US Dollar, the Yen – the most liquid, fully convertible currency in East Asia – acted as a proxy for the Chinese Yuan after the G7 summit of developed-world leaders said in Washington at the weekend that "we welcome China's decision to increase the flexibility of its currency...[but] we stress its need to allow an accelerated appreciation of its effective exchange rate."

The Chinese Yuan remains fixed to the US Dollar, albeit within a "flexible" band that allows it to rise 0.5% each day – a daily limit raised from 0.3% in May. China's central bank countered the G7 statement by saying that "moving the exchange rates in the absence of economic restructuring policies will hurt China."

As the Yen shot higher this morning, 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.

The FTSE Eurofirst 300 index last week shed 2.3% of its value.

On the forex markets this morning, the British Pound spiked to a new 15-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.

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," says David Buik of Cantor Index of the European stock markets.

"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 reports their third-quarter results this week. Out of 131 companies so far, more than 25% have missed analyst forecasts, according to Reuters data.

US stocks suffered their worst day in two months on Friday, the 20th anniversary of "Black Monday" in 1987 – the greatest one-day tumble in history.

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.

The Federal Reserve meets on Halloween (Weds 31st Oct). A sharp cut to Dollar rates now would prove both trick and treat for bond investors hoping the Fed will try to rescue the US economy with cheap money.

"Obviously there is a limit to the extent that 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 since shot so high, it's pushed the yield 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 the largest US 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, Gold Prices rose more than 8-fold inside three years.

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Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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