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London Gold Market Report

Thu, Oct 2 2008, 13:29 GMT
by Adrian Ash

BullionVault.com

THE PRICE OF GOLD sank 2.1% Thursday morning in London, dropping to a two-week low near $850 an ounce – the very peak of gold's last bull in Jan. 1980.

Asian stock markets closed the day lower, while European shares gave back an early rally despite the overnight vote in Washington supporting the $700 billion bail-out for banks.

"The rescue plan will have a slightly marginal negative impact on the Gold Price," reckons Bayram Dincer, commodity analyst at Dresdner Bank in Zurich, speaking to Bloomberg today.

"But investors' willingness to pay for gold is around $850, $880 an ounce."

Today the US Dollar rose sharply on the currency markets, forcing the Euro down 12% from the start of last month at $1.3750 – a 13-month low – as traders bet that the next move in European interest rates will be down.

"We say 'Yes' to gold in good times and bad times," says Dincer. Come year-end, "investors will have the opportunity to Buy Gold as a further investment class for 2009 and 2010."

Following the Senate's 74-to-25 vote, President Bush said tonight's second attempt to pass the Banking Bill through Congress is "essential to the financial security of every American."

Today saw Irish politicians approve the Dublin government's €400 billion guarantee ($556bn) of the all retail and commercial banking deposits – as well as bonds – for the next two years, a move that sent British cash-savers fleeing for the tax-backed security of Ireland's big banks.

Over in Paris, French finance minister Christine Lagarde proposed a Europe-wide rescue fund, because "What happens if a smaller EU nation is affected by the threat of a bank going under?

"Perhaps this nation would not have the funds to save that institution. That raises the question of a European bailout plan." (Read more about this rush to rescue with Competitive Bail-Outs here...)

German bund yields tumbled once more, meantime, even as the European Central Bank (ECB) voted to keep its interest rate on hold at 4.25% for October.

The 12-month bund yield slid to 3.28%, almost one per cent below the start of Sept., after this week's flood of weak Eurozone economic data.

New figures today showed producer prices in the 15-nation currency union slipping 0.5% in Aug. from July. Annual inflation in factory-gate prices held above 8.5%.

"When the European Central Bank (ECB) was tightening policy," notes Steven Barrow at Standard Bank in London, "it rather cunningly used code-words like 'vigilance' or even 'extreme vigilance' to prepare the market for a rate hike.

"But now that an easing cycle is approaching, what is the ECB going to say? That it's 'less vigilant' or 'not very vigilant'...? No central bank, least of all the ECB, is going to say that it has let its inflation guard down. So it has got to work on its semantics as much as its monetary policy.

"The market has got to wise up to the monetary policy nuances that [ECB chief] Jean-Claude Trichet et al may toss its way in coming weeks and months."

Whatever central bankers might now do to Eurozone interest rates, sales of central-bank gold fell to a record low in the year to Sept. 26th, according to an initial estimate from the World Gold Council.

Sales during the fourth year of the current Central Bank Gold Agreement (CBGA) – capped at a possible 500 tonnes per year – reached just 357.2 tonnes, and "taking account of known plans and past selling patterns, sales are likely to remain relatively low," say the WGC's analysts.

"With the financial turmoil we are seeing, central banks would rather hold onto their gold," agrees Robin Bhar, analyst at Calyon bank in London. (Why do Central Banks Own So Much Gold? Get the historical scoop here...)

Gold Mining output – which last peaked in 2003, when prices were half their current level – continues to struggle meantime. Ex-world No.1 South Africa produced 10% less between April and June as it did in 2007.

Today South African gold junior Pamodzi Gold finally announced a $50 million loan it's been seeking since the second-quarter of '08.

The world's fourth-largest gold miner, South Africa's Gold Fields Ltd, announced the $8.8 million sale of its Biox technology business – which enables gold ore recovery from mine-site waste – to Bateman, the engineering group, stating that Biox "does not form part of its core business activities."

Evidence of collapsing car sales in the United States, meanwhile – down 26% in Sept. from the same month last year – today sent the price of platinum and palladium tumbling once more.

Well over half of these metals' new annual supply goes into catalytic converters.

Platinum prices slid below $1,000 an ounce on Thursday, a near three-year low, losing more than 56% from the record top of March this year.

Published on  Thu, Oct 2 2008, 13:30 GMT