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London Gold Market Report

Tue, Aug 19 2008, 12:58 GMT
by Adrian Ash

BullionVault.com

Gold Rally Stalls Again But "Long-Term Drivers Intact" as Inflation Hits 27-Year Record in US and Germany

SPOT GOLD PRICES slipped once again after recovering half of a 2.3% overnight drop early in London on Tuesday, stalling as both the US and Germany reported a sharp jump in producer-price inflation.

Asian stock markets closed at a two-year low, and palladium traded in Tokyo fell to its lowest level since June 2006.

Platinum – used more commonly in auto-catalysts – fell 6% to an 11-month low.

Over in the oil-rich Caucasus, meantime, Russian troops blockaded the major Black Sea port of Poti – some 350 miles from the disputed region of South Ossetia – and took Georgian soldiers prisoner.

"The credit crunch of the past year has reduced liquidity available to precious metals traders and speculators," says Jeffrey Nichols at American Precious Metals Advisors in a report cited by Bloomberg.

"The result being increased volatility both on the way up and, as we have seen in recent weeks, on the way down."

Leveraged hedge funds and other large speculators last week slashed their bullish bets in the gold futures market by 18%. But private investment in retail products continues Surging on Lower Gold Prices, creating a supply squeeze across Western Europe and North America.

Gold dealers in Singapore and Dubai are also having to turn away customers looking for one-ounce coins. The Times of India reports "a shortage of the yellow metal" at local bullion banks.

Here at BullionVault, in contrast – where private investors buy and sell the same Good Delivery Gold Bars traded by professionals in the deep, liquid international market – dealing volumes continue to grow strongly with no block on supplies.

"We would be aggressive buyers [of Gold] at current levels," wrote Citigroup analysts John Hill, Paul Cheng and Graham Wark in a note to clients on Monday.

"It has been punished amid a broad-based correction in commodities [but it] is likely a short-term blip...as it underscores the frailty of fiat currency globally.

"We see gold as attractive, heading into a period of seasonally strong physical out-take, which tends to tighten the market and allow any negative macro catalysts to be rapidly transmitted to prices.

"Gold will likely shine over time. Long-term drivers remain intact – falling mine production especially in South Africa, competitive currency devaluations, wealth creation on India/China, and petro-dollar flows."

Today in Germany the Federal Statistics Office said inflation in Producer Prices for businesses leapt to a 27-year record clip in July of 8.9% from 12 months before.

US Producer Price inflation also reached its fastest pace since 1981, jumping to 9.8% year-on-year.

The Bundesbank today warned that "economic activity may not weaken to the extent" that inflation in prices slows down. Consumer-price inflation in Germany was pegged last month at 4.2% – only just shy of current Eurozone interest rates at 4.25%.

"The moment when money loses its purchasing power because real interest rates [after inflation] are negative...assets such as raw land, commodities, art and collectibles become a store of value," writes Dr. Marc Faber – the Swiss fund manager now based in Thailand – in the latest edition of his Gloom, Boom & Doom Report.

"I am still happy to accumulate physical Gold. In democracies, where the leadership is afraid to ask for sacrifices from its citizens and with money printers at central banks, gold would seem to be the only sound currency."

Early today, Home Depot Inc. – the largest DIY chain in the US – announced a 24% drop in quarterly earnings, helping to push S&P futures lower and adding to Monday's sharp losses.

Stock in the nation's largest home-finance groups, Fannie Mae and Freddie Mac, fell yesterday by 22% and 25% respectively after Barron's magazine said a much-rumored government bail-out will leave shareholders with nothing.

"The Barron's article overstated Freddie Mac's financial situation," countered a Freddie Mac spokeswoman.

"We continue to be adequately capitalized."

But "the worst is yet to come in the US," said Harvard professor Ken Rogoff – former chief economist at the International Monetary Fund (IMF) – at a conference in Singapore this morning.

"The financial sector needs to shrink. Like any shrinking industries, we are going to see the exit of some major players.

"We're not just going to see mid-sized banks go under in the next few months. We're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks."

Published on  Tue, Aug 19 2008, 12:59 GMT