Gold – "mystery buyer" fails to stop plunge - 4 January 2007

Gold has continued falling in Europe today after going nowhere in today's Asian trade.

This morning's drop comes after gold sank $12 per ounce on Wednesday – the same day that news a European central bank has been secretly buying gold broke in the mainstream press.

"This has the gold market abuzz," notes Dennis Gartman, editor of eponymous Gartman Letter. "[Gold is] becoming a flight-to-safety instrument once again," adds Kevin Kerr, co-editor of Outstanding Investments, "as more and more uncertainty builds with Iran and just what global economic impact it will have."

Little sign on Wall Street, however, of a flight-to-safety yesterday. The Dow roared to a fresh all-time high on heavy volume in the morning session, after the ISM index said US manufacturing rebounded last month.

Added to a sharp 4% drop in crude oil prices – driven lower by unseasonably warm weather in the north-eastern Unites States – this pushed the Dollar higher despite news that US construction spending slipped 0.2% in December. An early report on US employment also said private-sector jobs fell by 40,000 last month. Consensus expectations on Wall Street are for a rise of 103,000 on the official data due at 13:30 GMT tomorrow (Friday).

But it was news from the US Federal Reserve that undid Wall Street's heavy stock buying on Wednesday. Minutes from the Fed's policy meeting in December showed Dr. Bernanke and his team agreeing that inflation risks remain "of greatest concern and that additional policy firming was possible."

Equity and bond investors alike have been betting on lower US interest rates as early as February. So like the Treasury bond market, the major US equity indices pulled back on Wednesday afternoon to end the day unchanged.

"Everybody thought that we would have a [gold] rally," one US analyst said to Reuters. Yet "the rally fell apart. The next thing you know this market just gave back virtually everything."

In the near term, however, Standard Bank in London notes that the gains in gold over the Christmas period had come on very light volume. That has made the current correction all the more likely.

But anyone selling gold today may have cause to regret it very soon. A leading Indian gold analyst notes that mine supply is due to fall this year – just Indian investors get access to their own exchange-traded gold funds (ETFs).

Add this to the evidence that a major European central bank has been buying gold, and gold could see a sharp rise as 2007 unfolds. For the full story with detailed analysis, click here now...