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London Gold Market Report

Thu, Sep 11 2008, 12:33 GMT
by Adrian Ash

BullionVault.com

THE PRICE OF GOLD fell yet again early in London on Thursday, slumping from an overnight floor of $756 to reach a new 11-month low at $739 per ounce.

World stock markets fell for the seventh Sept. session in nine as investors fled all asset classes for cash, dragging Russian equities to a new two-year low and pulling Taiwanese stocks to their worst average since late 2005.

Crude oil slipped, soft commodities sank, and the risk of a major financial default – as measured by the CDX index of credit-default swaps – rose once again.

The Euro fell through $1.39 on forecasts of lower Eurozone growth, capping the fall in Gold vs. the Euro at a four-week low of €535.

Only US Treasury bonds managed to climb against the all-conquering Dollar, however, pushing the yield paid by 10-year notes down to a five-month low of 3.61%.

"With the Dollar steaming ahead, and ignoring technical momentum signals, US bonds continue to attract safe-haven investment flows," writes Manqoba Madinane at Standard Bank in Johannesburg, "creating a positive feedback loop for the greenback.

"Further appreciation for the Dollar should precipitate more fund liquidation in precious metals."

"The sellers do not look like they are running out of steam yet," agrees today's note from Mitsui in London. "Gold broke a three-year trend-line yesterday as it fell below $760, and with additional technical selling coming to the market we are under pressure once again."

Wednesday saw the SPDR exchange-traded gold fund in New York cut its holdings by 2.5%, taking the shrinkage in these Gold ETF shares to 91 tonnes since mid-July.

"It’s time to look at other [price] objectives on this liquidation," says the latest technical analysis from Stephen Malyon at Scotia Mocatta, the London-based bullion bank.

"The 76.4% retracement of our one-year range is seen at $735. A full 100% reversal would have gold down at $643."

Looking at the on-going collapse in Gold Mining stocks, Barry Sargeant at MineWeb notes "the 25% contraction in the Dollar gold bullion price...but an average weighted loss in value of 57% in the case of 179 listed gold stocks.

"This indicates that investors in listed gold stocks are discounting further falls in the Dollar Gold Price."

Back on the currency markets today, the British Pound tumbled through $1.75 – undoing in eight weeks what it took ten months to achieve back in 2006 – after US academic David Blanchflower, the most dovish member of the Bank of England's policy team, told UK politicians to expect month-on-month job losses of 60,000 even as inflation in the cost of living rises to 5%.

The New Zealand Dollar sank to its weakest level in two years – down 19% from March – following a larger-than-expected 0.5% cut to Kiwi interest rates.

Consumer food prices in New Zealand jumped 2.6% month-on-month in August, the official data agency said today, sharply higher from July's 0.6% increase.

Crude oil slipped back to $102 per barrel despite Hurricane Ike gaining strength as it heads for the coast of Texas and the major US oil installations in the Gulf of Mexico.

Meantime in the United States – where the ABC consumer confidence index for last week fell below analysts' already miserable expectations – Dow Jones futures pointed almost 1% lower ahead of Wall Street opening for business.

Shares in Washington Mutual yesterday fell 29% to close at a 17-year low as the price of its debt sank so fast, its yield-spread grew wider than Lehman Brothers' – which in turn is now wider than Bear Stearns' spreads just before its collapse in mid-March.

"We'd expect the Dollar to sell off far more on this type of negative news," says Michael Woolfolk, chief currency strategist at Bank of New York Mellon.

"What this means is the turmoil we're currently seeing in US financials is pushing investors to the sidelines and [forcing] many international investors to the Dollar." (But should investors trust the Almighty Dollar & Its Keepers to defend its value? Read on here...)

"The market's still shaking out who's going to be able to survive if the economy continues slowing down and home values continue to decline," agrees Mirko Mikelic, head portfolio manager at the $34 billion Fifth Third Asset Management group in Michigan.

"Capital is precious, and if you have it, you want to hold onto it because more write-downs are coming down the pike."

Published on  Thu, Sep 11 2008, 12:34 GMT