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London Gold Market Report

Fri, Aug 15 2008, 09:28 GMT
by Adrian Ash

BullionVault.com

Gold Slumps to Nine-Month Low as "Shaky" Speculators Bale Out; Private Investors "Actively" Buying as Real US Interest Rates Sink to -3.6%

THE SPOT PRICE OF GOLD sank yet again at the London opening on Friday, falling 2.6% to touch a nine-month low as US crude oil prices dropped 1.3% to trade below $114 per barrel.

Western European stock prices rose meantime in early trade, averaging 0.8% gains despite this week's clear signals of economic recession ahead.

Versus the almighty US Dollar, the British Pound slumped 0.8% to its lowest level since July 2007. The European single currency fell to a fresh five-month low beneath $1.4700.

"More gains in the greenback should expose crude oil prices to further downside potential," writes Manqoba Madinane in today's Gold Market note for Standard Bank in Johannesburg, South Africa.

"This could keep precious metal investment demand at bay today."

US Treasury bonds continued to rise alongside the Dollar in Asian trade on Friday, nearing their third weekly gain on the trot despite yesterday's shock jump in America's official Consumer Price Index.

Even after stripping out so-called "volatile" yet essential energy and food products, the cost of living is now rising 0.5% per year ahead of the Federal Reserve's key interest rate.

After allowing for inflation in eating, heating and transport, real US interest rates now stand at minus 3.6%, but with real estate prices continuing to plunge the futures market expects "no change" from the Fed until December or beyond.

Today the Wall Street Journal reports a survey of 53 professional economists, 3-in-5 of whom think the US government will have to save top mortgage lenders Fannie Mae and Freddie Mac with a cash bail out, further extending Washington's fiscal debt – pegged at near-record growth of $107 billion last month alone.

"Excess liquidity is what got us into this situation in the first place," notes Joe Foster, gold strategist and co-manager of the $13 billion Van Eck investment funds.

"The loans and liquidity the US government provided hasn't cured the situation. We have to clear all the bad debts and silly spending. No amount of government spending can hurry that process or help alleviate that."

Today, however, Goldman Sachs slashed its three-month target for Gold Prices from $890 per ounce to $745 – right where the uptrend starting in late summer 2005 now sits and precisely 25% below gold's all-time record top of $1,032 set back in mid-March.

"The region around $750 is very important," said Adrian Koh, an analyst in Singapore with Phillip Futures, to Reuters earlier, "because this is a long-term gold uptrend support."

"It's still early to say it's the end of the super-cycle but if the markets continue to fall like they are doing now, I am sure many people will be talking about it very soon."

The previous "blow-off top" in Gold saw the metal drop 25% of its Dollar-value between May and June 2006. During the 1970s' bull market, the price of gold fell by one-half after rising six times over.

It then rose eight-fold between Sept. 1976 and Jan. 1980, peaking at $850 per ounce.

"Many of the shakier speculators and investors have probably baled out in the last few days," writes Wolfgang Wrzesniok-Rossbach in the latest Precious Metals Weekly for Heraeus, the German refining group.

"[They] will probably not be seen in the market for sometime to come."

On the upside, meantime, "physical demand is back again and this will most likely get stronger from Sept. onwards; the increase in net production, if any at all, is happening at a very slow pace and secondary supplies are reducing."

South Africa, the world's No.1 gold-mining nation throughout the 20th century, reported a 12.3% decline in gold output for June compared with the same month in 2007.

"Our colleagues from Hong Kong report that after the recent price drop, they have seen robust demand coming not only from the jewelry sector but also from other industrial end-users," Wrzesniok-Rossbach  goes on.

"As a result – after being net exporter from Hong Kong in the recent past mainly due to getting in masses of scrap gold – [Heraeus is] now back to being a net importer.

"Here in Europe, despite the cheaper prices industrial demand thanks to the summer holidays, demand has so far remained restrained. Investors in physical bars on the other hand have been active and have used the lower prices to build up stocks."

Published on  Fri, Aug 15 2008, 09:29 GMT