Gold Slips on Dollar Bounce

By Pete Southern in LiveWire Economics Blog | January 6, 2009 15:00 |

THE PRICE OF GOLD fell further in London on Tuesday morning, sliding 2.2% from Monday’s US close to hit $840 an ounce – its lowest Dollar-level since Christmas Eve.

European stock markets rallied, while government bonds also retreated, pushing 10-year US Treasury yields up to 2.51%.

Crude oil rose above $50 per barrel as Israel expanded its ground offensive in Gaza, and European states including Austria, Bulgaria, Greece, Macedonia and Turkey said their supplies of natural gas have been cut since Russia halted flows to Ukraine in its dispute over a long-term pricing deal.

“The pressure remains on Gold Prices,” says today’s note from Mitsui, the London precious metals dealer, “and our $845 support has now been taken out.”

UK gold investors also saw the price dip to a two-week low on Tuesday morning. The Gold Price in Euros, however, held little changed as the single currency fell hard on the forex market – down 10¢ from this time last week to $1.3340.

“Seems the [New Year] reallocation of funds in commodity indexes is adding supply to the gold market,” Mitsui continues. “With a lack of Indian physical demand due to an inauspicious period [on the Hindu calendar], one has to wonder where the support will come from?”

Western Gold Investment demand continues to grow, however, with the New York-listed SPDR Gold ETF continuing to keep a record volume of gold in trust – up by almost one-quarter from the start of 2007 to vault 780 tonnes in bank-owned facilities.

As a proportion of all speculative betting on Comex futures and options, new US data for last week showed the number of bullish trades at 90% – considerably above the 5-year average of 81%.

The total outstanding volume of Gold Futures contracts held by hedge funds and other “large speculators”, however, stands almost one-half below the record peak of January last year.

The commercial traders of refineries, mints, wholesalers and bullion banks, meantime, closed 2008 right in line with their bullish ratio’s 5-year average of 30.8%.

“People [actually] want real gold,” says Peter Hambro, chairman of the eponymous (and highly leveraged) Russian gold miner, interviewed today by the Financial Times.

“It is the physical market driving the price.”

Looking ahead to Gold in 2009, “The amount of [government] money being pumped into the system is vast,” Hambro goes on. “Interest rates get lower and lower, and the government is practically buying bus tickets to put more money in.

“At some stage, that money will start chasing real assets, and the deflation you see now will be followed by amazing inflation across the board.”

For now, and “while safe-haven buying of Gold Coins and bars continues,” says John Reade – commodity strategist for Swiss bank UBS in London – “this may not be enough to drive gold higher.

“Certainly, we are seeing no jewelry demand at the moment.”

The Bombay Bullion Association yesterday reported a 47% drop in India’s gold imports for last year from 2007’s record level.

But that said, “Gold’s move in the last couple of days is almost entirely due to the strength of the Dollar,” says Reade. And for anyone considering Gold vs. Other Investment Asset Classes in 2009, “the worst-case scenario for [all other investment] markets would be caused by a run on the Dollar,” warns Tim Bond – head of global asset allocation at Barclays Capital, also speaking to the FT.

A fresh panic out of the world’s No.1 reserve currency following its sharp bounce in the second-half of 2007 would “terminate the Fed’s attempts to Quantitatively Ease and reduce credit spreads,” says Bond.

“The effect on global markets would be catastrophic, with most asset values other than Gold collapsing.”

International money market data, released late last night, showed net positioning against the US Dollar rose on the forex market last week, up to a net-short position of $942 million from the previous week’s $559m.

That compares with a record short-Dollar position of almost $34 billion hit in late 2007, and the long-Dollar position of $15bn reached in Oct. ’08.

For every bet on the Dollar falling, of course, traders have to bet that another currency will rise – but “as a result of the global scope of the recession,” writes the head of David Hale Global Economics for the FT today, “there is no country that wants its exchange rate to appreciate.

As central banks everywhere slash interest rates and increase the money supply to devalue their currencies, “The clear alternative [therefore] to the Dollar in 2009 is that ancient form of money, gold,” Hale goes on.

“Precious metals could emerge as a hedge for private investors suspicious of central banks and fearful of inflation.”

Looking at the mechanics of Buying Gold in 2009, “Interest rates are very, very low right now, so that reduces the holding cost,” notes Imtiaz Ahmed of Macquarie First South, speaking to Johannesburg’s SAfm and comparing the cost of owning gold against holding official government currencies.

“I think the wind is starting to come to [gold’s] back, especially with all this money being thrown around. It’s going to be inflationary. I suspect that should be good for gold.

“Gold remains for me a long-term asset play.”

Adrian Ash
BullionVault

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.


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