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Gold Rises as Stocks, Crude Oil Leap on Weak U.S. Dollar

Commodities / Gold & Silver 2009 Jun 10, 2009 - 06:20 AM GMT

By: Adrian_Ash


THE PRICE OF GOLD rose early Wednesday, recovering two-fifths of last week's 4.5% sell-off at $963 per ounce as stocks and crude oil leapt on Dollar weakness.

"The price action for the past week has been bearish following test of 990," says the latest technical analysis from London market-makers Scotia Mocatta. "We believe the market will look to sell Gold on any rally while 966 holds [as resistance]."

Other dealers however saw Wednesday's action building on yesterday's gains, pegging "minor resistance" at $968. And when the Gold Price slipped below $950 on Monday and Tuesday, notes Walter de Wet at Standard Bank, "good physical buying resulted. In fact, buying interest is the highest since mid-April.

"The difference now is that physical buying is taking place at a price which is $70 higher than it was in mid-April – a bullish signal."

Wednesday saw the price of US crude oil jump to new 2009 highs above $71 per barrel, while European stock-markets jumped more than 2%.

The US Dollar meantime slid below $1.41 and $1.64 to the Euro and British Pound respectively, knocking the Gold Price in Sterling back towards fresh 5-month lows at £584 per ounce.

Eurozone investors now looking to Buy Gold saw the price little changed for the session at €682.

"Nobody is talking about dumping the Dollar. I don't think this is realistic," said China's vice-foreign minister He Yafei ahead of next week's BRIC summit in Yekaterinburg, Russia.

Bringing together leaders from Brazil, Russia, India and China for the first time – christened the BRIC economies by a Goldman Sachs report in 2003 – the meeting will also bring together four of the world's top 7 foreign-currency reserve holders.

Between them, the BRIC nations currently hold well over one-third of the $7.4 trillion total.

"At the moment there are some experts and academics who have raised the issue and are discussing it at [the BRIC] level," said He when asked about the idea of a new supra-national world currency to take the Dollar's position as No.1 reserve currency – a proposal already made by Russian and other Chinese officials.

As a proportion of world currency reserves by value, the US Dollar has now fallen from 71% in 1999 to 59% today, reckons Simon Derrick, currency strategist at the Bank of New York Mellon.

His analysis puts the remaining 31% in Euros, with Sterling's share rising to 5.5% – up from 4.7% in 2008 – and just 2% in Japanese Yen.

US Treasury debt fell along with the Dollar on Wednesday, pushing the yield offered by 10-year bonds up to 3.89%, a new 8-month high.

"Attitudes toward commodities is entirely different now from 2004. I sense investors have deepened their understanding of commodities," said Shogo Yoneyama of Daiwa Asset's new product team in Tokyo to Reuters this morning.

Daiwa's second commodity fund to be targeted at retail investors, launched this April, swelled by 60% last month as Japanese savers rushed to buy hard-asset exposure.

May saw the Reuters-Jefferies CRB index of 19 heavily-traded commodities gain 14% – the largest one-month rise in 35 years.

Holding some $15 trillion in investable wealth, Japan's private households currently have only 0.1% of their money in commodities, says Reuters' analysis.

Meantime on the supply-side of the Gold Bullion market, "In Germany, as well as noticed by our colleagues in Hong Kong, volumes of scrap-gold sales have not increased despite high prices," writes Wolfgang Wrzesniok-Rossbach in the latest Precious Metals Weekly from refining group Heraeus in Hanau.

"It appears that scrap-gold holders have liquidated most of their inventory during the first quarter of this year," he adds, echoing Mitsui's recent comment that the massive scrap flows of Jan. to April – perhaps as great as 1,000 tonnes and equal to 40% of annual Gold Mining output – may have exhausted close-to-hand supplies of broken and unwanted jewelry worldwide.

Noting the typical summer lull in world gold-jewelry demand, "June and July have been traditionally slow months for gold sales," says one importer in Delhi, India – the world's hungriest gold market since being deregulated in the mid-1990s, but overtaken at the start of 2009 by neighboring China.

"By August demand should pick up," he told Reuters today.

Longer-term, "My personal view is that asset-price deflation and sluggish economic growth will prevail for the next year and a half," said CEO of London precious-metals consultancy Paul Walker in a Tokyo interview Tuesday.

"Under that scenario, gold's investment value starts to look far less interesting."

But "Given the mindset of American economic policymakers," counters Hong Kong-based asset manager Marc Faber in June's Gloom, Boom & Doom Report, "a post-1989 Japanese deflationary economic scenario is not very likely.

"We still like gold."

By Adrian Ash

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 , 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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