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London Gold Market Report

Fri, Sep 5 2008, 12:14 GMT
by Adrian Ash

BullionVault.com

SPOT GOLD PRICES struggled below $800 per ounce in Asia and London on Friday, heading towards a 5% loss for the week as the US Dollar rose yet again versus everything else except Treasury bonds.

Crude oil dipped towards $106 per barrel, while the Australian Dollar – a key "commodity currency" – hit new 12-month lows.

The German stock market fell nearly 6% from this week's high, hit on Tuesday, after the Federal Ministry of Economics today announced that industrial production in the world's third-largest single economy fell 1.8% month-on-month in July.

The Euro dropped below $1.42 for the first time in 11 months.

Pointing to Friday's key US data release, "the market [was] looking for around 75,000 jobs to have been shed," noted Steven Barrow at Standard Bank in London, "a bit more than the average fall seen so far this year.

"If the [August] decline is bigger than this, the Dollar will fall – right? That might be the knee-jerk reaction, but we are not so sure.

"For a start, it seems that the market is super-bullish of the Dollar right now, ready to jump on any slide in oil prices. But more importantly, while US employment might be falling, productivity is rising fast.

This means, says Barrow, that the US economy "is not suffering as much as some other countries – like the Eurozone and Japan, where productivity growth is much lower."

(Does that make for a new Super Dollar or Global Deflation? Read more here...)

"Central banks around the world are facing tough policy choices and are unlikely to raise interest rates," said Wallace Ng, head of precious metals in Asia for Fortis Bank, to Bloomberg today, "which is Dollar supportive.

"Gold may face further downside as the US Dollar is likely to keep rising."

Investors continued to pull money out of the US exchange-traded gold fund, SPDR, this week, forcing the Gold ETF to sell 1.5% of its gold holdings on Tuesday.

That took the total shrinkage from SPDR's record-top of late July to almost one-tenth.

Over in India, however, gold demand is still "rising significantly" as the peak festival season begins according to Rahul Gupta, head of P.P.Jewelers in Delhi, speaking to Reuters this morning.

"The buying period usually starts in August and September," says Ashok Minawala – the chair of All India Gems & Jewelry Trade Federation in Mumbai – "with the [peak demand] festival of Diwali in October.

"But this has been unprecedented," he told the Financial Times overnight, "tremendous."

Yesterday marked the start of the 12-day festival of Ganesh – the Hindu "Lord of Obstacles" who both places and removes problems.

Early October will see West Bengal in particular mark the 5-day festival of Durga Puja, yet another auspicious time for Gold Buying.

Indian gold demand has shot to a 20-year record since the start of August. Today's Economic Times of India reports average sales volumes in Chennai alone of around 10 kilos per day.

"Even in tier-II cities," the newspaper adds, "sales have vaulted 30-40% according to Indore-based Punjabi Saraf Jewelers."

While demand from the world's No.1 gold-buying nation surges, however – alongside a jump in retail investment sales that's caused a Gold Coin Shortage in many Western world markets – the supply response from gold mining companies continues to flag.

Former world No.1 South Africa saw gold production between April and June fall by 10.4% year-on-year, the Chamber of Mines said Thursday.

The industry also reported two further deaths at South African gold mines, taking the total to five this week alone.

South Africa's mining industry is also failing to meet its Black Economic Empowerment (BEE) targets, says a new report from the KPMG consultancy, threatening to hike mining costs further still as energy supplies remain weak and ore grades decline.

Worldwide, resource exploration companies are "really suffering" due to a lack of financing, said Tim Markwell – an investment manager at the African Lion Funds – to the Africa Down Under conference in Perth, Australia yesterday.

London's AIM exchange (alternative investment market) is experiencing a particular "liquidity issue" he told Creamer's MiningWeekly, capping new exploration and – therefore – long-term production.

And yet credit analysts at S&P this week forecast a sharp decline in long-term Gold and base metal prices, because "high prices ultimately provide the incentive to increase output through new investment or by reopening previously unprofitable mines.

"Even small amounts of oversupply can drive prices down to the industry's marginal cost of production," says the S&P report, quoted by Dorothy Kosich at MineWeb today.

Slashing their nickel forecast for 2011 by one-quarter from today – and knocking aluminum prices 28% lower "long term" – the S&P analysts peg Gold at $750 an ounce between now and 2010, followed by a further drop to $650 in 2011 and then $500 from there.

Cash-costs per ounce across the world are now rising for the sixth year running in the Gold Mining industry. The very largest producer, Barrick Mining, last week raised its 2008 guidance more than 7% to $441 per ounce.

Global gold mining output peaked in 2003, falling almost 5% to full-year 2007.

Published on  Fri, Sep 5 2008, 12:15 GMT