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London Gold Market Report

Tue, Oct 27 2009, 13:43 GMT
by Adrian Ash

BullionVault.com

Gold Falls to 3-Week Low as "Scrap Supply Wins", Bank of England Says Only "Nutters" Fear Inflation

WHOLESALE GOLD dropped to a 3-week low as Asian stock markets fell hard early Tuesday, twice bouncing from $1037 an ounce as the US Dollar rose on the forex market.

Crude oil held at $78 per barrel while European share ticked higher in morning trade. Government bonds also rose, pushing interest rates down.

The US Treasury will today auction $44 billion in new two-year debt.

"Physical [gold] demand from India picked up on this move," says one London dealer, "but it seems scrap supply from Asia (strong once again last night) has won the fundamental battle."

"Gold has broken lower," agrees Scotia Mocatta's technical note, "[after] price action over the past two weeks formed into a small triple top.

"It is too early to say whether the move will be deeper then 1025," the bullion banks' analysts say.

"1044 will likely hold any retracement."

"Physical buying is being overshadowed by investment selling of gold," says Standard Bank, "but we have seen some buying interest at these levels.

"Technically, gold could test $1024, from where we see a recovery."

On the data front this morning, the Case-Shiller Index of US home prices showed a smaller-than-expected drop of 11.3% for the year to Sept.

Money-supply growth in the 16-nation Eurozone fell last month to 1.6% annually, the slowest pace since current records began in 1980.

Outstanding loans to households and business across the 350 million citizen currency zone shrank for the first time on record, down 0.3% from September last year.

"The Bank of England's quantitative easing policies contributed both to the prevention of a deflationary spiral and the subsequent improvement in credit conditions, asset markets, and inflation expectations," said UK policy-maker, the American academic Adam Posen, in a speech in London on Monday.

Stating that late 2008's credit crisis saw markets "locking up in ways and to a degree that was completely unexpected, even by those who forecast a recession or crash," Posen calls those people who now fear quantitative easing could spark strong inflation "nutters".

But "If as at present or in the 1970s, deposits and fixed-income investments provide savers with a return that is less than the rate of inflation, then savings rates are bound to decline," writes Martin Hutchinson at Prudent Bear.

"A capitalist economy cannot survive if its risk-free rate of return is below or close to zero for prolonged periods, because people will have no incentive to defer consumption and so capital will disappear.

"You only have to look at the unhappy fate suffered by the German Weimar Republic and various Latin American countries in bouts of hyperinflation to see the result of de-capitalizing the economy in this way."

Back in the gold market on Tuesday – where the Russian government said it's cancelled plans to sell 50 tonnes of metal per year from a state-owned subsidiary, following a leak of the news yesterday – the gold price in Euros slipped below €700 for the second time in two days, hitting a 3-week low of €697.60 an ounce.

UK investors looking to buy gold today saw it re-touch last week's low of £632.50 an ounce.

"With everyone talking about the high price of gold and customers getting used to recycling, the timing is perfect," said John Nichols, head of H&T Group – the UK's largest pawnbroker – as he announced a 52% rise in first-half profits this morning.

H&T has opened "Gold Bars" in 56 branches to buy unwanted and broken jewelry, planning further expansion between now and spring 2010.

Over in China, in contrast – where vice-premier Li Keqiang said today that although "the pace of [economic] growth is quickening quarter by quarter...our near-term policy will focus on preventing deflation" – leading retailer Hong Kong Resources forecast "double-digit growth" in jewelry sales for 2009.

First-half sales rose 16% according to chairman Kennedy Wong, led by middle-class households strong savings rate. (Learn about China's Galloping Gold Consumption here...)

Studying the leveraged investment market, meantime, "The cumulative net long non-commercial position for soybean, wheat, corn, gold, silver, platinum, palladium, copper and WTI crude oil contracts is at the same level as in May last year," reports Walter de Wet at Standard Bank today, "indicating large speculative activity in the commodities market.

"The only difference now is some economies are showing signs of a recovery. In May 2008, most economies were on the decline."

Pointing to "a clear correlation between Dollar weakness and a rise in speculative length", de Wet expects commodities to remain "partly a Dollar play" and also to suffer "sizable corrections lower", because greater hot-money flows means greater volatility.

Nevertheless, "We expect buying on large dips," Standard Bank's chief commodities analyst concludes.

Published on  Tue, Oct 27 2009, 13:44 GMT