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London Gold Market Report

Wed, Oct 28 2009, 13:42 GMT
by Adrian Ash

BullionVault.com

Gold Bounces from Bear Stearns' Top, Stocks & Oil Fall on "Risk Averse" Dollar Rally

THE PRICE OF GOLD for Dollar investors fell for the fourth session running on Wednesday morning in London, dropping as world stock markets sank 1.5% and crude oil fell to $79 per barrel.

Losing 3.5% from its record high of a fortnight ago, the Dollar gold price bounced higher from $1032 an ounce – the previous all-time high, set when the Bear Stearns investment bank collapsed in March 2008.

"Bullion is [now] trading against risk aversion," says Andrey Kryuchenov at VTB Capital in London.

"The Dollar is still a preferred safe-haven asset, to a certain extent."

"There is potential for a short period of Dollar strength and subsequent consolidation for gold," reckons David Barclay at Standard Chartered in Hong Kong, quoted by Reuters, "but this will be temporary as we see the Euro/Dollar at $1.55 by year end.

"What's driving gold now is liquidity-driven moves in risky assets, which are weighing on the Dollar and creating concerns over future inflation."

Open interest in US gold futures ticked lower today from last week's new record high, but the number of outstanding contracts held above the level of 504,000 reached when the Dollar price hit its new all-time high at $1070 an ounce on 13 Oct.

Gold priced in other currencies was little changed from Tuesday, as the US Dollar rose sharply on the forex market.

The Euro dropped from near 14-month highs to a two-week low beneath $1.48. The gold price in Euros held shy of €700 an ounce.

"The Dollar will remain the principal reserve currency for a long time," said US Treasury secretary Timothy Geithner at a New York conference on Tuesday.

"[The economy] is in a much stronger position than it was, but it's a mixed picture. All broad measures of confidence are better...We've achieved this initial sign of recovery much faster than expected and during past crises."

Consumer confidence data from the Conference Board yesterday said that barely 16% of US citizens expect hiring to improve between now and April. The number of consumers expecting their income to rose fell from 11.2% to 10.3%.

Foreclosure filings fell in five of the top 10 metropolitan areas between June and end-Sept., but nationally the volume of default, auction and bank repossession notices rose by 5% according to the RealtyTrac consultancy, rising 23% from the same period last year.

Filings were reported on more than 937,000 properties, says Reuters today.

"It is essential that in the recovery we are able to continue to keep monetary policy relatively loose," said UK opposition spokesman Philip Hammond of the Conservative Party to Bloomberg here in London today.

"We will only be able to do that if we have got the deficit under control."

UK government spending is forecast to beat 2009 revenues by £180 billion ($293bn). The Bank of England's "quantitative easing" program has already bought that volume of government debt with newly-created money.

The real rate of interest paid on household savings accounts – after inflation – has now averaged less than zero since April 2001.

Reviewing his 7-year forecast from June 2002, Jeremy Grantham of GMO – the Boston-based fund management running $89 billion in client money – warns that investors face "seven lean years ahead".

Grantham's call on "boring fair value" almost precisely matched the global market's path in the 7 years to end-June '09, accurately picking emerging-market equities to top his table with annual of gains of 14% above US inflation.

Not included in either Grantham's forecast nor his review, the gold price in Dollars averaged annual returns over that time-frame of 21% above inflation.

"I know a lot of people are buying gold for investment purposes," says one shopper interviewed by MSNBC outside luxury retailer Harrods' new Gold Department in London.

Harrods private banking team say that market research ahead of launch showed "surprisingly emphatic demand from both gold investors and shoppers alike."

Published on  Wed, Oct 28 2009, 13:43 GMT