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London Gold Market Report

Fri, Oct 23 2009, 13:17 GMT
by Adrian Ash

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Gold Nears Record Weekly Close, "Break-Out Pending", as Sterling Sinks on Worst Recession in History

GOLD HEADED into the weekend more than 0.6% up on the week here in London on Friday, gaining as world stock markets also rose alongside crude oil and commodity prices.

Recording an AM Gold Fix of $1061.25 an ounce – its best-ever Friday fix in Dollars – gold also rose against the Euro as the single currency held flat vs. the Dollar.

UK investors saw the gold price reverse all of this week's losses, leaping to £648 an ounce as the Pound sank on news the UK remains in recession.

"Gold prices will continue to be influenced heavily by Dollar movements," reckons James Steel, metals analyst at HSBC Securities in London.

"Should the Dollar weaken, gold is likely to remain well bid."

Looking at this week's tight 2% trading range, however, "Note how gold's correlations with oil and stocks are breaking down fast with this sideways movement," says Phil Smith for Reuters Technical India.

"The yo-yo consolidation is becoming smaller and smaller," agrees Russell Browne at Scotia Mocatta. But "micro analysis shows triangular price behavior, suggesting a break-out is pending.

"Typically these formations are continuation in nature, so the risk is a break of $1070 that should yield a $26 move to $1096."

Crude oil ticked higher above $81 per barrel Friday morning, but government bonds ticked lower – pushing yields higher – everywhere except the UK, which reported a surprise drop in economic output for July to end-Sept.

The British Pound sank on the forex market – dropping 2¢ to the Dollar inside an hour – as 10-year gilt yields unwound this week's rise to one-month highs at 3.75%.

Falling for six quarters straight, the UK economy has now suffered its longest recession on record. "There's no disguising how grim [the UK] figures are," says Hugh Pym, chief economics correspondent at the BBC in London.

"Almost every City analyst expected there to be positive growth in the third quarter."

Germany's IFO expectations index meantime came in better-than-expected, but New Industrial Orders across the 16-nation Eurozone surprised analysts by remaining more than 23% lower in August than 12 months before.

Spain's unemployment rate held at 17.9% between July and end-Sept.

"The output gap does not need to close for inflation to accelerate, as evidenced by periods of stagflation throughout history," write Natalie Dempster and Juan Carlos Artigas in the World Gold Council's latest Gold Investment Digest.

"Whether you share the view that inflation is coming or not, you simply need to acknowledge that there is a camp that does."

Challenging the complaint that gold has yet to beat its Jan. 1980 high when priced in inflation-adjusted Dollars, "The 1980 peak needs to be put in context," the WGC's latest report goes on. "The run up was incredibly quick and short-lived. The gold price only fixed there for one day.

"A much fairer representation would be to take a three-year average around 1980 [which] in inflation-adjusted terms is $1118 an ounce...very close to where gold is trading today."

On the supply-side of the gold market today, a source at Russia's state repository Gokhran told the Reuters news agency it may sell a total 50 tonnes of metal in 2009, helping the Kremlin to fund its first budget deficit of the decade.

Declining oil revenues were matched by a sharp fall in the Russian Rouble early this year. Despite the doubling of crude oil prices to the current 12-month highs since then, the state deficit for 2009 may still hit 7.7% of GDP.

Any sales from Gokhran, part of the finance ministry, would be easily matched by gold investment demand however, according to TheBullionDesk news service here in London.

"I think the largest institutions like our own are realizing that we barely own any," said Shayne McGuire, head of global research at America's 7th largest pension fund the Teachers Retirement System of Texas, in an interview with Bloomberg in Hong Kong today.

"The same thing applies to most of the pension funds which manage trillions of dollars in world wealth."

"I don't think the question really is what is gold worth but what are currencies not worth," says McGuire, author of Buy Gold Now in 2008.

"Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing. [Gold is] financial insurance."

Published on  Fri, Oct 23 2009, 13:18 GMT