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London Gold Market Report

Wed, Jul 1 2009, 12:56 GMT
by Adrian Ash

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Gold Up, Dollar Down as Fed's Great-Depression Fears "Risk Hyper-Inflation"

THE WHOLESALE PRICE of investment gold jumped as the New York opening drew near on Wednesday, recovering most of yesterday's $20 drop as the Dollar fell on worse-than-expected US jobs data.

Kicking off the second-half of 2009 more than 7% higher from New Year's Day for US investors, gold had earlier recorded a one-week low for UK and Eurozone buyers at the AM Gold Fix in London.

European stocks rose sharply, while US crude oil broke back above $71 per barrel.

The S&P stock index closed last night 1.7% higher from the start of the year.

London's FTSE100 ended the first-half some 4.0% lower, as did the Gold Price in Sterling.

"The US central bank has structured and introduced policies without considering exponential credit growth and its consequences," says investment manager and author Marc Faber in an interview with the Korea Times today.

Recommending inflation-friendly assets such as equities and Gold Bullion, "The United States will not raise interest rates for many years to come because it needs to pay off its huge debts.

"In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation."

Confirming the US central bank's policy stance, "Let this not be another 1937, but a time when policymakers have the wisdom and patience to nurse the economy back to health," said Janet Yellen, president of the San Francisco Federal Reserve Bank, on Tuesday.

Speaking in California – where yesterday's failed State budget meeting means that Controller John Chiang will now issue $3.4 billion in I.O.U.s in lieu of cash – "I'm more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery," Yellen said.

On the data front this morning, China reported a fourth month of increased manufacturing output, while the rate of decline in Europe slowed.

Across the 16-nation Eurozone, the Purchasing Managers Index (PMI) – a measure of business conditions in manufacturing – gave its best reading since Oct., but continued to signal falling output for the 13th month running.

The decline in UK services output slowed to its smallest drop in six months.

America's private-sector ADP Payrolls report, in contrast – a proxy for the official Non-Farm Payrolls report due on Thursday – showed a much sharper-than-expected loss of US jobs for May, taking the 2009 total to 3.4 million so far.

"This has been a government-induced rally" in the stock market, reckons $110bn fund manager Jordan Irving at Delaware Investments in Philadelphia, speaking to Bloomberg.

"We need to see some real positives coming from internal demand, as opposed to government-related demand, and it's just not there."

Data from the newswire shows US investment-grade debt returning 9.2% to investors over the first half of 2009, beating government bonds by 13.7 percentage points as Treasury debt suffered its worst sell-off in three decades.

Back in the gold market, the second quarter of 2009 saw volatility in Gold Prices – a strong deterrent for jewelry and investment buying in Asia and India – fall sharply in all currencies.

Most particularly, daily volatility in the Gold Price in Euros, which cuts out the "noise" of US Dollar forex volatility, has now retreated to its lowest level in 20 months, falling by almost four-fifths from the record peaks of Oct. '08.

"Demand from the jewelry sector seems to have stabilized, partly based on the expectations that the price is going to pick up," said precious metals analyst David Wilson at Societe Generale this morning to Reuters.

"The physical buyers are getting used to the higher price range and looking at any dip as an opportunity."

Demand from the world's hungriest gold market, India, remains subdued however, as the summer lull in religious festivals and weddings wears on.

"Sales have been bad for the earlier part of the year," says one dealer in Mumbai. "Only a correction below $900 per ounce could see interest re-emerging," says another.

The Bombay Bullion Association puts Indian gold imports at 8-10 tonnes for the first 3 weeks of June, compared to 17-18 tonnes during the same period last year.

Gold imports to Turkey, in contrast, jumped in late June as scrap sales dried up says the Istanbul Gold Exchange.

"About 80 tonnes of gold were collected by jewelers" between Jan. and May reports Hurriyet.

"In the first five months of 2008, gold worth $1.5 billion was imported. This year, that figure declined to $1.95 million [but] due to falling prices, the country’s imports began to climb over the past three weeks to stand at $125 million."

Published on  Wed, Jul 1 2009, 12:57 GMT