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Gold's Sluggish Summer Near Its End as Huge US Debts Threaten the Dollar

Commodities / Gold & Silver 2009 Aug 26, 2009 - 07:34 AM GMT

By: Adrian_Ash


THE PRICE OF GOLD drifted sideways in what one Hong Kong dealer called "sluggish" trade early Wednesday, briefly touching $950 an ounce as a rally in Asian stock markets failed to carry over to Europe.

The Gold Price in Sterling rose to £582 an ounce, its best level since June 10th, as the Pound sank to a 6-week low on the forex market.

For US, Eurozone and Japanese buyers, the Gold Price held in the middle of this summer's trading ranges, recording an AM Gold Fix in London just north of its June-to-Aug. averages.

"Trading activity looks unlikely to pick up until we near [the August contract's] option expiry tonight," notes a Far East trader.

"Historically liquidity is thin in the last full month of summer," says Gene Arensberg in his Got Gold Report – "the last full week of August particularly so.

"That is a subtle hint that the 'dawg daze' won't be with us very much longer."

Since 1969, research from BullionVault shows, the price of gold has dipped in 20 summers before rising sharply in fall to end Dec. higher than both the start of the year and also the peak hit in spring.

The gain for UK investors Buying Gold in the summer's cheapest month averaged 13.7% by the following Feb.

Back in the forex market, "The credibility of the Fed seems intact, for now," says currency strategist Steven Barrow at Standard Bank today, commenting on Tuesday's re-appointment of US central-bank chief Ben Bernanke.

"As a result it does not look as if the Dollar is going to fall out of the sky."

Taking the Fed's official interest rate and adjusting it for the bond market's current forecast of 10-year inflation, Barrow notes that real US rates are little different from real rates in the Eurozone.

"[So] we still see a move to $1.55 for the Euro," he concludes, "but not something like the $1.70s or 1.80s – which would be consistent with the idea that the Fed has lost the inflationary plot."

Early Wednesday saw the price of crude oil slip further from Monday's 10-month high, while US and Eurozone government bond prices rose. Following yesterday's revision of new US debt to $9 trillion over the next 10 years, however, "Increased pressure on the borrowing requirement of the US government...could push US long-term yields higher," counters Barrow's commodities colleague Walter de Wet.

"That would be negative for Gold. [But] we also believe that higher borrowing needs could discourage foreign investors away from US bonds, which should lead to Dollar weakness. We also believe potential Dollar weakness could outweigh any higher interest rates at least for the next four quarters."

Capping the Euro below $1.43 early Wednesday, new data showed import price deflation in Germany accelerating last month, taking the year-on-year drop in imported-goods prices to 12.6% as the Euro rose on the forex markets, worsening the terms of trade for domestic producers.

[What might the outlook for the Euro say about the short-term outlook for gold...? Learn about Anti-Dollar Investing here...]

The fall in Japan's export sales also accelerated in July, down 36.5% from the same month in 2008.

On the consumer side of world trade – which rose 2.5% in June from May, according to the Netherlands Bureau for Economic Policy Analysis – Spain's economy grew less quickly than previously guessed in 2008, admitted national statistics institute the INE on Wednesday.

Spanish GDP grew by 0.9% last year, rather than by 1.2%, and it also grew less quickly than previously stated in 2007.

The Spanish economy – already returned to the late 1990s' jobless rate of 1-in-5 – is expected to shrink by 3.2% in full-year 2009.

"It would be premature to say the crisis is over but the freefall has clearly ended," said European Central Bank (ECB) policy-maker Jose Manuel Gonzalez-Paramo in an interview with Europa Press today.

"The international financial system is still in a correction phase. There is still a lot of uncertainty over the health of financial and banking institutions and their capacity to resist fresh economic turbulence.

"It's very important that the banks avoid being over cautious."

Looking at the broader European economy, "The periphery countries are net debtors," says a detailed report on Spain's financial sector from Variant Perception in London, "and the rest of Europe is the net creditor.

"When a debtor can't pay, the creditor suffers. Germany, France and others will need to cope with recapitalizing the periphery and Spain."

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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