Gold Sinks Through "Major Support" as Zero-Yielding Currencies Rise; Physical Trading Jumps on "Safe Haven" Bid
Spot Gold prices sank Monday lunchtime in London, dropping $20 in 20 minutes to trade at $825 an ounce as world stock markets fell across the board.
Crude oil tumbled 5% to $38.85 per barrel, while government bond prices also dropped.
The zero-yielding US Dollar and Japanese Yen both rose yet again on the currency markets.
"Gold opened [Monday] at the 100-day moving average and is steadily ticking lower," says a technical note from Mitsui, the precious metals dealer, citing "major support at $830.
"With Japan out on holiday, Spot Gold and silver have been dominated by the Euro dropping below $1.34. It now looks likely to test support at $1.33."
The Gold Price in Euros still dropped 2.2% early Monday, however. Measured against the British Pound, wholesale gold traded 10% below last week's all-time record peak of £612 an ounce.
"Sterling surged last week despite a mounting tide of pessimism," notes Steven Barrow at Standard Bank in London.
"It rose despite another sharp cut in the base rate and some loose talk that the Bank of England could rent out Ben Bernanke’s helicopter to drop pounds on the unsuspecting British public."
How come? Because "with currency markets starved of liquidity, there may be a limited role for 'fundamentals' right now," Barrow suggests. "Currency markets are not functioning normally – a general problem at the moment."
Following a flood of poor economic data, the European Central Bank (ECB) is now expected to join the US, Japan, Switzerland and Britain in slashing its interest rates when it meets this Thursday.
"The ECB has a sad track record of always showing up late to the party," says one economist at ING. But Bank of America forecasts a drop from today's 2.5% target rate to 1.5% by end-March.
Deutsche Bank expects Euro rates of just 0.75% by end-June.
Back in the gold market, meantime, new data released after Friday's close showed the volume of betting on US Gold Futures and options grew yet again last week, rising to stand nearly 18% above mid-Dec.'s 30-month low.
The number of bullish bets held by hedge funds and other "large speculators" rose to a five-month high. Compared to the number of bearish bets they held, the bullish ratio for this group – sometimes known as the "dumb money" thanks to their habit of chasing the wrong trend at the wrong time – rose to a 12-month high above 91%.
The so-called "smart money" of commercial traders (meaning refineries, mints, wholesalers and bullion banks) were 31% bullish, just ahead of their 5-year average. In absolute terms, the Comex gold derivatives market remained 40% smaller from the start of 2008.
"Futures and options trading of gold on [official] exchanges increased more than 80% in 2008 to a record $5.1 trillion," reports London's IFSL consultancy in a new report today.
Physical Gold Bullion trading outweighed that volume almost three times over.
"The traditional 'safe-haven' appeal of precious metals has attracted many investors to this asset class," IFSL goes on. "Gold turnover increased 58% in 2008 to a record $20.2 trillion. Most of this activity was transacted through the LBMA (London Bullion Market Association)."