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Gold Rally Corrects After Strong Bull Run

Commodities / Gold & Silver 2009 Jun 03, 2009 - 06:01 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF PHYSICAL gold dropped 1.5% from new 14-week highs in lunchtime trading in London on Wednesday, turning higher from $975 per ounce as equity markets fell and the US Dollar rallied on the foreign exchanges.


"Higher interest rates would pose a risk to gold, but higher interest rates aren't going to happen," said Frank Holmes of US Global Investors in opening the World Mining Investment Congress in London on Tuesday – "much reduced in size this year from last" according to one delegate at the $6,000 event.

"If you are not long, you are going to be wrong on gold. Longer term, governments will do everything to print money and gold will slowly become an important asset class worldwide."

Today French, German and Italian investors now Ready to Buy Gold saw the price hold below €690 an ounce as the single currency retreated from a new 2009 high vs. the Dollar above $1.43.

The Gold Price in Sterling – trending lower since peaking at £700 an ounce on Feb. 20th – meantime flirted with 7-week lows near £590 after the British Pound leapt yet again on the currency market.

Hitting fresh 7-month highs above $1.66 to the Dollar, Sterling has gained more than a fifth from February's two-decade low.

"We have clearly had a case of selective myopia," writes Steve Barrow, currency strategist at Standard Bank in London, "where the market has ignored all the bad news about the UK and, instead, focused only on whatever crumbs of comfort that there have been."

Pointing to the net "short" position held by currency speculators still betting that the Pound will fall, Barrow repeats his call for $1.82 within a year – and perhaps "a lot sooner than we think" – because "the market is still not back to a more neutral position for Sterling."

Over in the commodities market on Wednesday, US crude oil futures moved sideways just north of $68 per barrel – a level first broken in Aug. '05 and more than 50% below last June's top – while copper prices at the London Metal Exchange eased back from yesterday's new 7-month highs.

Commodity specialists Platts report that copper traders from China – likely to remain a net importer in 2009 and buoyed by government stockpiling - have been offering to sell metal onto Japanese buyers after prices broke above $5,000 per tonne.

"China's steel industry will soon be swamped with raw material," the newswire goes on, quoting the China Mining Association's fear of 200-300 million tonnes of excess iron ore if recent stockpiling isn't unwound.

China imported more than 443m tonnes of iron ore in 2008, well over half of total global deliveries.

But "If [Asian central banks] make a loss, it's okay," said a source quoted by Reuters today.

"As long as they are sticking to the policy imposed from the very top, they are not concerned with short-term gains...They are not competing against mutual funds or hedge funds."

Speaking on condition of anonymity after US Treasury secretary Tim Geithner's series of meetings in Beijing this week, "The US Treasury bond is a partnership the Chinese government holds," the source went on.

China's central bank grew its stockpile of US government debt by 56% in the last year to $768 billion, says the newswire.

"What other central banks have been doing must be reversed," said German chancellor Angela Merkel, at a conference in Berlin on Tuesday.

"I am very skeptical about the extent of the Fed's actions and the way the Bank of England has carved its own little line in Europe."

The Federal Reserve has almost trebled its balance-sheet in the last 12 months, buying and lending against mortgage-backed and commercial-loan securities that were otherwise untradable.

Also slashing its interest rate to near-zero, the Bank of England has embarked on £125 billion of "quantitative easing" in the UK economy, effectively creating money to buy government debt, and covering well over 65% of this year total state spending.

"Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds," Merkel went on.

"We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, 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.

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