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London Gold Market Report

Fri, May 9 2008, 11:22 GMT
by Adrian Ash

BullionVault.com

Gold Hits 9-Session High as Politicians Blame Oil-Led Inflation on Speculators, Not Cheap Money

PHYSICAL GOLD BULLION reached a nine-session high at the AM Fix in London on Friday, nearing its first weekly gain in four as world stock markets fell hard and crude oil recorded yet another all-time high.

The US Dollar slid against all major currencies barring the British Pound.

"It's hard to see a clear trend at the moment on Gold," said Michael Widmer, a metals analyst at Lehman Brothers, to the Sydney Morning Herald overnight.

"Probably we are going to bounce around in the near term."

But "with the Euro appreciating against the greenback and crude oil testing new highs," says Walter de Wet for Standard Bank in Johannesburg, "the yellow metal's fortunes changed" on Thursday.

Today the price of US crude oil rose above $125 per barrel, more than twice the level of May last year.

"Gold saw good support around $880," says de Wet. "Primary resistance is [now] seen at $889, and secondary resistance at $898. A break higher might see gold test $910."

In contrast to the Gold Market's overnight gain of 0.9%, European shares fell 1% in morning trade and Asian stock markets closed 1.5% lower on average after AIG Inc. – the world's largest insurance company – reported a net loss of $7.8 billion to the German stock exchange.

AIG dumped 7% on the news. The CEO, Martin Sullivan, says AIG needs to raise $12.5bn to repair the last six months of losses.

Government bond prices rose as money came out of equities, pushing the yield offered by 3-month US Treasury bills down to 1.65% annualized. But investors choosing the apparent "safety" of government debt are losing out to inflation.

Consumer price hikes in the US were last pegged at nearly 4% per year.

"This inflation speed-up must be taken seriously," warned John Lipsky, managing director of the International Monetary Fund (IMF), in a speech in New York on Thursday, "as it creates potentially significant challenges to economic stability."

Lipsky said that a return of 1970s-style double-digit inflation looks unlikely. But the risk "cannot be discarded out of hand" – and he advocated "aggressive" action from world leaders.

Right on cue, the government of India yesterday banned futures trading in four key commodities. Democrat senators in Washington want to raise the initial margin charged to US oil traders in a bid to reduce speculation.

But a new survey of 53 professional economists by the Wall Street Journal found barely one-in-10 blames speculators for pushing raw materials higher.

"Fifty-one percent of the respondents said demand from China and India was the prime factor in soaring energy prices," the WSJ goes on. "Constraint in supply was cited second most often."

Only 9% of respondents thought central-bank policies were to blame for the surge in food and energy prices. But John Lipsky at the IMF warns that the rapid easing of US interest rates since Sept. '07 has "also tended to generate an easing in monetary conditions in countries with currencies closely linked to the Dollar," fueling inflationary pressures in Asia and the Middle East.

Auto-maker Toyota and camera-maker Olympus both said rising input costs are hurting their profitability today in Tokyo. The Reserve Bank of Australia revised its inflation forecast higher for 2008, expecting a peak of 4.5% mid-year.

Back in the Gold Market, Indian prices rose to 11,960 Rupees per 10 grams after last night's end to the two-day Akshaya Thritiya festival.

"Compared to last year's festival, Indian Gold Demand dipped by over 25%," reports the Times of India, but "the saving grace was good demand from southern states and a new trend of buying gold on the auspicious day in the north."

India remains the world's hungriest market for physical gold bullion. The local office of the World Gold Council (WGC) reckons gold sales during this week's Hindu festival fell 15% by volume from 2007, but they raised an extra 15% in cash for India's Gold Dealers thanks to sharply higher prices.

In the global scrap gold market, "we are seeing a mixed picture as far as the supply side is concerned," writes Wolfgang Wrzesniok-Rossbach for Heraeus, the German refinery group.

"While private investors in Europe, despite the lower Gold Price, continue to off-load holdings in coins and bars to smelters, the Asians have been cutting back on the supply of gold scrap.

"Far Eastern demand for one-kilo [Gold Investment] bars seems to have remained constant."

Today in London the Gold Price in Euros rose to a two-week high of €575 per ounce.

British investors wanting to Buy Gold today saw the price reach £454 per ounce, almost 5.6% above the four-month low hit at the end of last week.

Published on  Fri, May 9 2008, 11:22 GMT

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