Gold News

Gold Prices reached a 9-session high at Friday's AM Fix in London, nearing their first weekly gain in a month 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 explains. "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.

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Gold Prices hit a 7-session high of $884 per ounce in early New York trade on Thursday, gaining as world stock markets held flat and the US Dollar fell on the currency markets.

Crude oil dropped more than a dollar from yesterday's new record high of $123.93 per barrel, while government bond prices rose, pushing the yields offered to new buyers lower.

"Inflation rates have risen significantly since autumn," said Jean-Claude Trichet, head of the European Central Bank, after keeping Euro interest rates on hold today at 4.0%.

"As we have said, inflation rates are expected to remain high for a rather protracted period of time before gradually declining again."

The Euro gained almost 1.5¢ on the ECB's decision, while the Gold Price – which showed a near-perfect correlation of 0.97 with the Euro/Dollar exchange rate at the start of this year – gained 1.8%.

Last week Gold and the Euro showed a daily correlation of just 0.51.

"The current bounce back above $870 per ounce we do not believe will be sustained," reckons an analyst at J.P.Morgan, "as central banks are showing stronger inflation vigilance currently, which removes one of the key positives for gold.

"Some physical buying is protecting the $850 per ounce area, but long liquidation will cap the upside."

Central-bank "vigilance" on inflation, however, now means Eurozone interest rates barely higher than rises in Germany's cost of living index. US interest rates are half the current level of consumer-price inflation.

The Gold Market leapt by 57% between Aug. and March as the Federal Reserve set about slashing the price of Dollars. And following the 15% drop in world Gold Prices of the last seven weeks, the speculative froth has clearly come off.

"The global gold book" of investors betting on rising Gold Prices through exchange-traded derivatives and trust-fund shares "is now at its lowest level since the week of 18 Sept.," notes Mitsui – the precious metals dealer – "when Gold was trading at $715."

Meantime in the US housing market – home to the subprime crisis which sparked the Fed's rate-cutting campaign – "there are signs the worst is over" claims Elvis Picardo, an independent investment strategist writing for Reuters.

The S&P's five largest homebuilding stocks have gained 11% so far this year, he notes, after losing more than two-thirds of their value from Jan. 2006 – proving that "investors are cautiously picking up the pieces," Picardo believes

Writing in the Wall Street Journal, Cyril Moulle-Berteaux – a managing partner at the Traxis Partners hedge fund in New York, writing for the Wall Street Journal – says today that "housing led us into this credit crisis and this recession. It is likely to lead us out."

Mortgage repayments "now take 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer," says Moulle-Berteaux. He also dismisses the idea that "house prices need to fall another 30%" simply because they remain 30% above their long-term inflation-adjusted average.

But like Picardo and Paulson, however, Moulle-Berteaux doesn't consider the possibility that US house prices will overshoot on the downside.

Last week the co-founder of KB Home, the fifth-largest homebuilder in the US, forecast a further 20% drop in average house prices due to "a big inventory of unsold, unoccupied homes that’s going to take three or four years to clear out."

"I don’t think we’re anywhere near a bottom in housing," Eli Broad told Bloomberg at a conference in Beverly Hills, California.

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