Gold News

Stock market losses outpace gold; bond yields slide despite higher oil prices

Spot Gold Prices slipped $5 per ounce to $664 by lunchtime in London on Wednesday, losing 0.7% from Tuesday's US close. Global stock markets, meantime, fell a further 0.9% according to the MSCI index.

"Gold holds its own in credit crunch," reports today's Fortis Metals Monthly report. Looking ahead, and "given the background noise of rising central bank sales the metal did well to stay above $650/oz [but] it might have trouble staying there as gold mining companies. dehedging slows for the remainder of the year."

For now, "the indications for gold are not positive today," reckon Dresdner Kleinwort analysts in a note. "US economic data released today might increase the worries about the fall-out of the sub-prime mortgage crisis."

Following the surprise jump in July's US input prices reported yesterday, today brings US consumer price data at 08:30 EST. Forecast at 0.2% for the month - unchanged from the previous reading - it will be accompanied by data showing Net Foreign Purchases of US securities during June. Wall Street consensus is for just half of May's shock total of $126 billion.

"Risk aversion does not appear to be helping gold at present," say analysts at BNP Paribas in their latest quarterly review. "Gold seems to be suffering whenever world financial markets fret about a Chinese equity meltdown or a US sub-prime mortgage collapse."

But the Spot Gold Market, whilst 4% down from April's high against the Dollar, still record a 4% rise from the start of this year. Versus the other major currencies, indeed, gold has continued to rise throughout the current stock market turmoil.

The Morning Fix in London on Wednesday priced gold against British Pounds at £334.42 per ounce, the highest level since June 7th. Gold Priced in Euros recorded an AM Fix of €492.84, the highest price for French and German investors wanting to Buy Gold Today in nearly three weeks.

Meantime in the bond market - where the inflation fears of early summer have quickly switched to expectations of lower central-bank interest rates ahead - prices of government debt also continue to rise. Two-year US Treasury bond prices today hit an 18-month high, pushing yields down to just 4.33%. The yield on 10-year US Treasuries slipped one point to 4.71%, down from 5.32% barely two months ago.

According to Bloomberg data, interest-rate markets now see an 88% chance that the Fed will cut US rates to 5.0% at its Sept. meeting. The likelihood of a further cut by December has doubled to nearly one-in-two.

With output prices from China expected to rise following the 10-year high in consumer price inflation reporting on Monday, the confluence of lower bond yields and rising living expenses could well trigger a long-term allocation to gold by investors squeezed in the middle.

Short term, "gold is down because of the strengthening Dollar," says Wolfgang Wrzesniok-Rossbach at Heraeus, the German refining business. "Metals are hit because of declines in the equity markets," adds an analyst at Standard Chartered Bank. Citing the sharp declines in base metal prices including aluminum, copper, nickel and zinc, he says "there has been no drastic fundamental change in metals themselves."

Industrial metals have a very correlation with global equity prices, and despite Tuesday's fresh injection of €47.7 billion by the European Central Bank into the short-term money market, the FTSE Eurofirst 300 index closed 1.2% lighter. By lunchtime in Frankfurt it stood a further 0.7% down.

The S&P on Wall Street closed last night 1.8% lower. The Nikkei dropped 2.2% by the close in Tokyo in today. Here in London, the FTSE100 has now dropped nearly 700 points - well over the commonly-cited 10% slump deemed to mark a “correction” - inside one month.

Crude oil prices, meantime, rose again early Wednesday, as Tropical Storm Dean moved into the Caribbean and another storm brewing in the Gulf of Mexico headed for US refineries and oil fields.

"We have a big hurricane factor now," says Michael Davies, a commodity analyst at Sucden UK. "We could have some very sharp price spikes in oil."

To find out what rising inflation plus lower bond yields and interest rates is likely to mean for the Gold Bullion Market, click here to download a free report - as a PDF file - now...

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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