Spot gold prices open London $14 cheaper from last Monday

Spot gold prices slipped $4 in Asia on Monday, dropping to $677.50 by the London open – a $14 discount from last week's opening – in thin trade.

Tokyo was shut – and will be again on Thursday and Friday – for public festivals. The Golden Week holidays should keep Japanese trade very light tomorrow and Wednesday, too.

The Chinese markets, meantime, will close for the rest of this week from tomorrow.

"Expect an extremely quiet session during the Asian and European time zones as a result," advises the Mitsui team in London.

"Gold is feeling a bit heavy this morning, but remains in the middle of the $670-687 range." (Read more on Asian demand for gold here...)

Friday's late bounce in spot gold prices – driven by the weakest US growth data in four years, plus the arrest of 172 suspects in a foiled "terrorist plot" in Saudi Arabia – put the weekly close at $681.50, down $10 from April 20th.

But the US Dollar swiftly recovered on Monday in Asia.

By the start of Frankfurt business today, the Dollar had pushed the Euro back 0.9¢ from its all-time high of $1.3682.

As gold also ticked lower versus the Dollar, it held above £340 per ounce for Sterling gold buyers.

Against the Euro, gold briefly touched the key €500 per ounce level before slipping back to open London at €498.20.

"The [gold] rally that has been beating gravity for almost two months in a row has been showing signs of exhaustion for quite a while," said Pradeep Unni, a Dubai analyst for Vision Commodity Services, earlier.

"But consistent support from the physical market ahead of the key marriage season in India has brought in renewed hopes that markets would hold on to the gains."

Bloomberg's weekly survey of gold analysts and investors shows a marked decline in bullishness following Thursday's $14 drop.

No news led that move, suggesting it was driven by disappointment or impatience.

Gold failed to break $692.80 – a new high for the rally starting in October – on Monday last week. It then ticked lower, despite repeated claims by several pundits that $700 was imminent.

Out of 26 professionals interviewed on Friday, says Bloomberg, only 12 advised buying gold. (Get the longer-term technical outlook for gold here...)

Looking ahead – and "with gold finding support and rebounding from the low-$670s" – "perhaps it is an indication the correction could be over," says Standard Bank today.

"Strong physical demand is likely to continue to underpin the market, but with the Chinese and Japanese markets closed in the Far East for most of this week, it brings into question the level of buying likely to emerge if prices were to dip again."

Until Thursday's sharp drop, spot gold prices had risen for 7 weeks running.

Friday's close in New York undid only two weeks of those gains. Gold opened London today up 5.8% for 2007 so far.

"We continue to believe the gold price is set to reach new highs in this cycle helped by further weakness in the US Dollar ahead," said analysts at Deutsche Bank in a report late last week.

And the fundamental driver of this bull market – unfettered growth in money supply and credit creation – also rolls on.

The Chinese authorities yesterday ordered banks to hold 11% of their deposits in reserve, the third increase in reserve ratios since Jan. and a 0.5% rise from previously.

The move will tie up an additional 170 billion Renminbi, according to the Financial Times, equal to $22 billion.

But with the US paying China $673 million each and every day on average to cover its trade deficit so far in 2007, the flood of cheap Dollars driving bad investment and competitive devaluation in Asia looks set to continue.

For more on why gold benefits when all paper currencies race to the bottom, click here now...