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London Gold Market Report

Mon, Jul 14 2008, 11:37 GMT
by Adrian Ash

BullionVault.com

Tokyo Gold Breaks 25-Year High as Eurozone Stocks Bounce on Fannie-Freddie Bail Out; UK Cost Inflation Jumps to 30% Year-on-Year

THE SPOT PRICE OF GOLD slipped 1% against the US Dollar at the London opening on Monday, giving back one-third of Friday's $23 surge as crude oil dropped and government bond prices fell.

Credit spreads – a measure of investor concern over the risk of default – also ticked lower after Sunday's promise of unlimited tax-funded support for Freddie Mac and Fannie Mae, the $5 trillion US mortgage companies, from the Treasury in Washington.

European stock markets meantime rallied for only the fourth time this month, buoyed by the first big takeover stories since J.P.Morgan bought Bear Stearns in March.

Over in Tokyo, Japanese gold futures touched a 25-year high of ¥3,340 per gram, closing 0.8% higher as the Nikkei stock index slipped to a three-month low.

"The fact that Gold broke through with such gusto [on Friday] suggests that we may now see the development of a longer term trend, rather than a return to the range of the past 3 months," say Stephen Malyon and Sacha Tihanyi for Scotia Mocatta here in London.

"However, with such heavy upside price action over the past two days, it is not inconceivable that we may face a slight pause before moving higher. Primary resistance now lies at 980."

On the data front this morning, the United Kingdom reported a fresh all-time record for inflation in Producer Prices during June, with input prices rising 30.0% and output prices breaching double-digits year-on-year.

Tuesday brings the latest Producer Price inflation data from the United States, with Consumer Price inflation due on Wednesday.

Today the Eurostat data agency said Industrial Production in the 16-member Eurozone shrank 1.9% in May from April.

The People's Bank of China meantime reported a surge in its foreign currency reserves, up by 35% in the year-to-June to $1.81 trillion.

"A huge amount of money is coming into China and betting on the Chinese currency, the Yuan, being revalued higher," says Dwyfor Evans, an economist in Hong Kong for State Street Global Markets.

"This is creating an inflation impact and has become a big worry for policy makers."

Latest data point to a "short squeeze" in Gold futures in the week ending last Tuesday. Overall, the total volume of open contracts grew 2.1%, but the largest move came in the long position of commercial traders – those miners, refineries and bullion dealers whose very business usually makes them aggressive sellers of gold.

Speculative gold traders, in contrast, grew both their short and long positions in equal measure, says the Commitment of Traders report.

Trading in crude oil futures – now subject to political wrangling and lobbying in the United States – showed a similar pattern. Commercial traders re-opened one-third of the long contracts they'd closed since mid-June, while hedge funds and other large speculators in fact cut their bullish position by 3.5%.

Smaller private investors closed one in six of their bullish contracts, just before crude oil futures hit a series of new all-time records up to $147 per barrel.

"With respect to oil," writes Manqoba Madinane at Standard Bank in Johannesburg this morning, "we note that US Dept. of Energy statistics show gasoline demand completed an 11th consecutive week-on-week decline last week, retreating by 3.9%.

"This reveals evidence of demand destruction in the world's biggest crude oil consumer. If oil corrects this week, this could subdue precious metals investment fund flows.

"[But] the equities market is ever more stressed. The Dow has now clocked a 16.32% year-to-date loss, with European equities performing even worse. Commodities should continue to benefit from equities' suffering."

Today Bloomberg News says 18 out of 25 professional traders and analysts it surveyed around the world at the end of last week believe Gold Prices will continue to rise between now and Friday.

Five advised selling Gold. The last two were neutral.

"Once again there is almost a perfect storm brewing," says today's note from Mitsui, the precious metals dealer in London.

Citing "weak US Dollar, firm crude & smoldering geopolitical tensions," it believes "there is a good chance we'll see $1,000 tested in the short term...It wouldn't be surprising to see speculative interest in high strike calls start to increase."

Besides the paper promises of gold futures & options, last week also saw a surge in holdings at the world's exchange-traded gold funds (Gold ETFs).

The GLD fund traded in New York added 47.52 tonnes, notes the latest Got Gold report at Resource Investor, "the largest one-week increase in metal holdings since GLD’s inception in Nov. 2004.

"It easily tops the second largest weekly increase of 39.62 tonnes set the week of 23-27 Jan. 2006, with gold then trading in the $560s."

Published on  Mon, Jul 14 2008, 11:37 GMT