Gold News

Gold Falls as Oil Sinks; New Surge in Cheap Money & Public Spending Comes Despite Soaring Inflation

Gold sank almost 2% at the London opening on Tuesday, dropping to $802 per ounce as crude oil fell at its fastest rate since the US invasion of Iraq in 2003.

With Hurricane Gustav causing only "minimal damage" to Gulf of Mexico oil rigs, the US Dollar also surged yet again on the currency markets, pushing the Euro down 1.5¢ to a seven-month low beneath $1.45.

Commodity prices tumbled, led by that 7.5% drop in oil and a 5% drop in corn. Copper futures lost 3% while zinc fell 1.6%.

World stock markets were mixed meanwhile, jumping in Mumbai and Frankfurt but holding flat in London and closing 1.6% lower in Japan.

"Gold has now followed the $800-845 trading range for eight trading days," notes today's report from Mitsui, the precious metals dealer.

"With the end of the summer holiday season upon us," it adds – pointing to the re-opening of US markets after yesterday's Labor Day weekend – "the time has come for the yellow metal to step out of this boundary.

"Physical demand has acted as an important price floor [but] for Gold to move significantly higher, the return of the investor and speculator is essential."

Today in India – destination for one-fifth of world gold sales last year – the Bombay Bullion Association said gold imports last month jumped to 100 tonnes.

Coming after a Near 65% Drop in the first half of '08, that 45% increase in monthly gold demand from August last year "is mainly because of the fall in Gold Prices," said BBA president Suresh Hundia to the Economic Times.

Global demand from Western investors – sparked by the metal's 20% drop over the summer – has created a sudden Gold Coin Shortage across the United States, Canada, Germany and even South Africa.

"Prices have moved up a bit but people are coming to Buy Gold ahead of the Dussera and Diwali festivals," said Madan Jain of Auro Gold Jewelry in Mumbai to Reuters this morning.

Now India's post-harvest festival season, deemed an auspicious time to Buy Gold in the Hindu calendar, is fast-gathering pace. It will culminate with Diwali – the festival of light – in late October.

Even so, "if the Dollar remains as strong as it is at the moment, we could see the $777 low from mid-August retested," reckons Mario Innecco at MF Global in London.

"Gold could quite easily go there in the next day or two."

The US Dollar's sharp rally – taking it 10% higher vs. the Euro in just seven weeks – today knocked the British Pound down to its worst level since May 2006.

The Pound also continued to slide against the other major currencies as well, reaching a fresh record low against the Euro beneath €1.2250, after the UK government announced a raft of tax-funded aid for the over-blown housing market.

Trying to stem the fastest-ever collapse in UK property – a market where the average house price sits near a record six times average salaries...and which the government claims will need three million extra homes by 2020 to fix an apparent shortage – the New Labor administration today slashed its income from real-estate tax by £600 million, launched free 5-year loans for first-time buyers, increased mortgage-payment support for the unemployed, and brought forward its own program of new social housing.

UK government bond prices sank on the news, pushing the 10-year gilt yield up nine basis points to 4.55%.

For British investors trying to take cover from the collapse in Sterling, the Gold Price in British Pounds briefly dipped below £450 per ounce, before recovering half its losses at £453.50.

The Gold Price in Aussie Dollars was little changed as the Australian currency fell hard on the forex market following the Reserve Bank's first cut to interest rates in seven years.

In the 350-million citizen Eurozone, wholesale-price inflation reached an 18-year record of 9.0% year-on-year in July said the official data agency today. Stripping out volatile energy prices, so-called "core" inflation leapt to 4.3% annually.

"We have a short position [in gold] and our target is $790," said Tariq Mahmood – a technical analyst at Global Tradewaves in the fast-growing middle-eastern finance center of Dubai – to Bloomberg this morning.

But while hedge-fund investors "are still operating from the sell side," according to the latest Gold Futures analysis by Mitsui, "the recent liquidation activity [of bullish positions] was by far the most minimal volume since investors began their one-sided trading some six weeks ago.

"The latest data strongly indicates that the spate of recent selling is finally nearing a natural conclusion."

Back in Mumbai meantime, the Reserve Bank of India was believed to be selling US Dollars into the forex market today in a bid to support the fast-weakening Rupee.

The Indian currency hit an 18-month low this morning as rumors grew that new RBI chief Duvvuri Subbarao – yet another career academic leading central-bank policy – will stop raising interest rates after one last hike.

Consumer price inflation – which Subbarao himself has called "the king of tax on the poor" – is now running at 12% year-on-year in the world's most populous nation.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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