Gold Holds "Key" Level Near 2-Week Low, But "Strong Economy" Case for Buying Gold Loses Support - 25 September 2009

The Gold Price crept higher early in Asia and London on Friday, briefly reaching $999 but remaining 1.3% below last week's finish after suffering its worst daily drop in three months.

Asian stock markets closed lower as European shares held flat – pegging the German Dax almost 2% down for the week – while government bonds ticked higher.

Crude oil traded at $66 per barrel after losing 4.5% on Thursday.

Here in London, the five large market-makers who agree two "gold fixes" each day – both to clear outstanding orders and act as a benchmark price – set the AM Gold Fix at $997 an ounce.

That broke this month's second run of three consecutive days above $1,000.

"Investors who were Buying Gold as a hedge against inflation on economic hopes are finding they have less appetite," says senior Fukitomi analyst Kazuhiko Saito, citing the weakness in oil prices and sudden volatility in equities.

As investors pushed equities higher despite a lack of strong data this month, says David Darst – chief investment strategist at Morgan Stanley Smith Barney, speaking to the Chicago Tribune – an increasing number chose to hold Gold "as a calming device, a financial Tylenol."

Following Thursday's disappointing US home sales report, new data today confirmed a 20% drop in UK business investment, plus much-weaker-than-forecast growth in the Eurozone money supply.

On the monetary-policy front, Thursday saw the Bank of England, the European Central Bank (ECB) and the Swiss National Bank announce the end of US-Dollar liquidity injections to their local money markets, begun last year with help from the Federal Reserve.

The central banks will cease their 84-day Dollar loan auctions at the start of October. The offer of 7-day loans will then be withdrawn in Jan.

Bloomberg meantime noted that the United States authorities have reduced their monetary support to the financial system, cutting it by 9% since March to $11.6 trillion of loans, guarantees and asset purchases.

Over in Tokyo today, the Nikkei share index sank almost 3% as the Yen rose to a 6-month high vs. the Dollar and added 1.2% vs. the Euro, driven by Japanese companies repatriating profits for tax purposes according to lone analyst.

The British Pound sank further from Thursday's 1.8% plunge – its worst daily drop on Sterling's trade-weighted index since March 9th.

That buoyed the Gold Price in Sterling above £620 an ounce, more than 6% higher for Sept. so far.

Gold priced in Euros held just shy of €680, down 0.7% from Friday last week but 2.5% better from the start of this month.

"Investors finally started to lose faith in the yellow metal [on Thursday]" says one London dealer in a note today, pointing to yesterday's low of $991 as "key" support on a technical analysis.

"We [also] believe the $990 level is key support on a close basis," says Scotia Mocatta in its daily note, "as it has held since Sept 3rd."

Unlike the quiet dealing seen amid this month's price jump, however, physical gold dealers report a "very active market" as Gold Prices fell hard on Thursday, dropping $28 an ounce inside five hours.

MKS Finance in Geneva reports seeing "opportunity buying" as prices fell to the low $990s on Thursday, while Standard Bank reports strong "physical market buying interest in early Asian trade" today.

"Of note," says Walter de Wet, senior precious metals analyst at Standard, "the gold:silver ratio [of gold to silver prices] has increased from 59.70 in New York trade yesterday to 61.95 this morning – signaling that silver has decoupled from gold in overnight trade."

Over in the so-called "paper gold" market of derivatives and securitized metal, the world's largest Gold ETF – the SPDR – said its holdings shrank 0.7% yesterday as demand for its trust-based exposure to gold declined.

Open interest in US Gold Futures showed a small rise however from last week's 14-month record, increasing by 0.6%.

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