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London Gold Market Report

Wed, Sep 3 2008, 12:09 GMT
by Adrian Ash

BullionVault.com

THE SPOT PRICE of physical gold sank below yesterday's two-week low early in London on Wednesday, dropping to $790 before bouncing to $801 an ounce as Western stock markets fell sharply.

US Treasuries rose, pushing real yields after inflation almost 2% into the red on the 10-year bond, while the Euro slipped below $1.44 on the currency markets – a fresh six-month low.

The British Pound dropped another 1.5¢ to reach its lowest level since April '06. That left the Gold Price in Sterling unchanged above £450 per ounce.

Commodity prices continued to tumble, and crude oil stalled at $108 per barrel after sliding to $105, its sharpest one-day fall since the invasion of Iraq in March 2003.

Today the Karachi stock market plunged into the close on news of an assassination attempt on Pakistan's prime minister, Yousuf Raza Gilani, in Islamabad.

"We note that US credit risk, measured by CDX swap spreads, has remained flat," writes Manqoba Madinane for Standard Bank in Johannesburg today – "a trend we have noted for some time.

"This implies that current investor risk aversion does not justify precious metal safe-haven investment holdings."

But "with technical momentum sending warning signals, the risk of a downside correction for the Dollar is high – which could mean uncertain market sentiment."

The US Dollar has gained almost 11% vs. the Euro and nearly 30% vs. crude oil since the record lows hit this summer.

One of the world's biggest commodity hedge funds, Ospraie Management – running some £7 billion in assets – said today it will close its flagship fund after losing 27% last month alone.

Among the 42 stock-market funds tracked by Morningstar Canada, the worst performer "by far" was its Precious Metals Equity Index, down 11.3% in August and "making it two months in a row of double-digit losses" for Gold Mining stocks.

"On oil, I think the bulk of the correction is behind us," said Credit Suisse analyst Tobias Merath to Reuters this morning.

He believes that any dip in crude oil below $100 per barrel would cause the Opec cartel to cut production quotas, crimping global supplies to support prices.

Today in the Gulf, the Dubai Multi Commodities Centre (DMCC) reported that Gold trading through the emirate jumped by almost one-half during the first six months of this year, reaching $13.1 billion on "a surge in demand for gold," according to the executive director, Ian McDonald.

"Physical shortages have been reported by many dealers. We are also seeing demand being driven by currency concerns in the region as many investors perceive the precious metal as one of the few strong currencies."

(Want to take advantage of this drop in gold but frustrated by the Gold Coin Shortage worldwide? Beat the squeeze here...)

On the economic front today, the Eurozone economy shrank by 0.2% between April and June the official data agency reported.

Retail sales in the 15-member currency union fell 2.8% year-on-year in July.

The German Dax index slipped 1% on the news, while the FTSE100 here in London dropped 2% after the UK Services PMI index showed lower activity for the fourth month on the run.

For the US stock market, meantime, "This is just the last gasp," reckons Kathy Boyle, head of Chapin Hill Advisors in New York, speaking to CNBC overnight.

"From a technical point of view the [recent] rally actually did not look great. Pharmaceuticals aren't participating, none of the drug companies, none of the biotechs are participating, and tech is actually lagging.

"So this is really being driven by the financials...I'm still very worried."

Published on  Wed, Sep 3 2008, 12:10 GMT