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Gold Drops as U.S. Dollar Rises

Commodities / Gold & Silver 2009 Jul 08, 2009 - 07:23 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD dropped to a new two-week low lunchtime Wednesday in London, falling 1.6% from this week's start to slip through $918 an ounce.


US stocks meantime ticked higher at the open after Tuesday's sell-off, while stock markets across the Far and Middle East ended the day lower.

Emerging-market currencies also fell hard against the Dollar while crude oil dropped below $62 per barrel. The Euro touched its lowest level against the Japanese Yen since May 23rd.

"While we expect Dollar strength to weigh on gold, we are seeing good technical support and physical buying interest at the $919-920 area," reports Walter de Wet at Standard Bank.

"Given that gold remains bid, but with limited upside while risk aversion continues to rise, we advise Buying Gold in liquid emerging-market currency, [as they] may come under increased pressure."

Following Tuesday's 2% drop to 10-week lows in the US stock market, "Investors are becoming concerned that the recovery in the economy will not come as soon as expected and will not be as strong as expected," reckons one New York investment officer, speaking to Reuters.

"When there's talk about another stimulus plan that adds fuel to that fire. It intensifies the concerns about the timing and strength of the recovery."

Delinquencies on US credit card debt rose to 6.6%, the American Bankers Association said on Tuesday, confirming that "The biggest driver is job losses."

Today Japan reported a surprise drop in new Machine Orders for May, while Swiss unemployment rose to a 3-year high and the Eurozone raised to 4.8% the annual rate of economic contraction across its 16 member-states during the first 3 months of '09.

UK house prices meantime came in lower than expected for June, sliding back towards March's 5-year low on the Halifax index and losing more than one-fifth from the peak of Aug. 2007.

Monthly mortgage costs now average 30% of mean UK incomes, down from 47% two years ago.

The 1990s' housing slump took monthly UK mortgage costs below 24% of average income before prices turned higher, seven years after the peak.

On Tuesday the FBI said US home-loan fraud jumped by more than one-third n 2008 as foreclosures "fueled a rampant mortgage fraud climate fraught with opportunistic participants desperate to maintain or increase their current standard of living."

Launching a new "macro-prudential" framework for UK banking regulation that will raise capital requirements, prime minister Gordon Brown said that "If nothing changes as a response to the financial crisis, then the world will be more unstable and growth will be unsustainable."

The UK government wants the Financial Services Compensation Scheme – Britain's equivalent of the FDIC – to be pre-funded by banking subscriptions.

Now the owner of 16% of all UK government debt in issue, the Bank of England is expected to leave Sterling interest rates on hold at tomorrow's July meeting, perhaps extending its £125 billion quantitative easing program.

"Right now," says de Wet's colleague at Standard Bank Steven Barrow, studying implied volatility on forex options, "the currency market is telling us that liquidity remains very abundant, which is positive for asset prices and 'riskier' currencies."

Since normalizing after the collapse of Lehman Bros. last autumn, the liquidity signaled by implied volatilities on forex options is now "far in excess of anything we have seen through the past 10 years," says Barrow.

"Exit strategies from central banks could throw this all into reverse again, but we are not expecting this – at least not for the next year."

As the Dollar and Japanese Yen rose on the forex market on Wednesday, the Gold Price in other currencies sat tight within recent ranges.

The Gold Price in Euros moved to the lower end of its two-week range between €660 and €670 an ounce.

For UK investors now Ready to Buy Gold, the price held at £571, unchanged for the week so far.

Zurich Cantonal Bank in Switzerland said that last week the volume of bullion held in trust to back its Gold ETF offering rose 1.2% to 146.5 tonnes.

New York's SPDR Gold Trust – the world's largest exchange-traded fund – maintained its backing of 1,120 tonnes on Tuesday, down some 1.2% from last month's record volume.

Back in Wednesday's action, only government bond prices rose as the Dollar and Yen gained, pushing 10-year US Treasury yields down to a 7-week low of 3.44% as US president Barack Obama arrived in Italy for his first G8 summit of leading nations.

Chinese president Hu Jintao left before the meeting began, returning to China as protests continued and a curfew was imposed in the predominantly Muslim, energy-rich region of Xinjiang, where 156 people were killed in riots at the weekend.

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.

Adrian Ash Archive

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