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London Gold Market Report

Mon, Jul 28 2008, 12:41 GMT
by Adrian Ash

BullionVault.com

Gold Holds Tight in Thin Trade as Stock-Markets' Summer Vacation Begins with Fresh Losses

THE SPOT PRICE OF GOLD held inside a tight $5 range early Monday while the finance industry's summer vacation kicked off with a fresh drop in world equities.

Crude oil bounced $1.50 after losing 17% so far this month. The US Dollar fell to a three-session low vs. the Euro.

Government bond prices rose as investors sought the safety of fixed income, pushing two-year US municipal bond yields two basis points lower to 2.37% just ahead of the Wall Street opening – barely half the current rate of consumer-price inflation and down 0.4% from one month ago.

"There's a little bit of physical [gold] buying around," said Dick Poon at Heraeus in Hong Kong to Reuters today.

"People are delaying their purchases hoping for a fall of a few dollars," agreed a gold dealer at a private bank in India.

The world's hungriest market for physical gold, India has witnessed a 65% Drop in Gold Demand so far in 2008.

"The floundering state of physical [Gold] demand closely ties in with the market's expectation for activity in the seasonal calendar," says the latest Refining Monitor from Mitsui, the precious metals dealer in London.

Noting a marked slump in sentiment amongst the nine leading refining groups it surveyed, "June, July and August are typically quiet months and on balance have minimal impact on metal prices. The lack of optimism from our contributors – the lowest since October 2007 – is not altogether unsurprising."

Gold Prices surged by 31% in the five months after Oct. '07, hitting a peak of $1,032 per ounce in mid-March.

"Following the recent rush to own gold and in tandem with the swift price rise, the metal was due for a correction...We do not believe that gold is a sub $900 metal. However, in the current financial climate, it is necessary to absorb considerable pain before the metal finally breaks through $1,000 once again."

Over in the commodities markets early Monday, wheat prices rose sharply after Poland forecast a weak harvest following a dry June and wet July.

Consumer-price inflation and employment data are both due from the 15-nation Eurozone later this week. Monday morning brought news of a five-year low in German consumer confidence.

By lunchtime in Frankfurt, the Dax index of German equities stood more than 1% lower. The Gold Price in Euros ticked below €589 per ounce, little changed from Friday's close.

"Option strategies and option positions reflect the bullish outlook for the Gold Market," believes Bill O'Neill at Logic Advisors in New Jersey, also speaking to Reuters today.

"The general view is that Gold does have an upside bias despite the setback in the last couple of days."

Last week's Commitment of Traders data from US regulators the CTFC showed a small reduction of 1.7% in the total number of Gold Futures & options contracts now outstanding.

As a group, large speculators (such as hedge funds) cut their bullish and bearish bets in equal measure. Small speculators (meaning private investors) slashed their short position by 17% to a one-month low.

Commercial traders working for refineries, gold miners, wholesalers and bullion banks remained 75% bearish overall. (They are, after all, in the business of selling gold.) But their holding of long contracts on the Gold Price rose almost 2% in the week-ending last Tuesday to reach a 10-week high.

"There are a lot of people who think that by the end of the year we'll be trading $1,200 to $1,500," says John Bilello, a floor trader at the Comex exchange. Since these gold options are now trading well out-of-the-money, "they are not very expensive, so people are buying them."

Just as stock-market analysts and traders try to begin the Summer Holiday Missed in 2007, this week also brings the latest quarterly results from Britain's five largest banks, as well as earnings figures from the world's five biggest oil companies.

Lloyds TSB – which singularly avoided the more complex and riskier elements of the global credit bubble – kicks off the banking results on Wednesday. The worst drop is expected at HBOS – the UK's largest mortgage lender – where analysts forecast a two-thirds drop in net profit compared with April to June '07.

Oil-market analysts expect Exxon Mobil to report a 30% rise in net income to more than $13 billion on Thursday.

Today crude oil pushed 1.3% higher to $124.85 per barrel on news of fresh "militant" attacks in Nigeria, the world's eighth largest oil producer.

"This comes as the geopolitical risks flare elsewhere," said Rob Laughlin at MF Global to Bloomberg earlier, "with bombs in Istanbul and tough talking from Iran."

The BBC reports, however, that so-called "militants" in the Niger Delta are not coherent political groups. Instead, these heavily armed gangs regularly blow up key pipe-lines so that former oil-company employees can "hot-tap" supplies as part of a $60 million-a-day oil robbery.

The stolen supplies are shipped out to tankers waiting offshore, where they're mixed with legitimate cargoes.

Today a group calling itself the Indian Mujahideen claimed responsibility for a series of bomb attacks in Gujarat province at the weekend that killed 45 people. It killed 63 in Jaipur in May and declared "open war against India" over its support for US foreign policy.

Published on  Mon, Jul 28 2008, 12:42 GMT