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Gold Waiting on Crude Oil Next Move as Stocks Gain

Commodities / Gold & Silver 2009 Oct 19, 2009 - 06:23 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleTHE SPOT PRICE OF WHOLESALE GOLD held flat against all major currencies early Monday in London, opening the week at $1054 per ounce as world stock markets rose and government bonds ticked lower.

"Spot gold is still trying to break through the top of its 38-year uptrend channel at $1057," reckons Commerzbank.

"Gold on the weekly chart [posted] a flat week," says Scotia Mocatta – "a Doji formation which is often a warning for a pending trend reversal."

"My view is that gold's probably going to consolidate around current levels," said one Singapore dealer to Reuters this morning.

"I think gold is waiting for crude oil to top $80 before rising again on inflation fears," reckons a Tokyo analyst, also speaking to Reuters.

Crude oil today touched a fresh 12-month high above $78 per barrel, while foodstuff prices leapt again and copper rose almost 1%.

China's Shanghai stock index closed more than 2% higher on official data showing strong GDP growth for 2009 to date.

European stocks added 0.9% on average by lunchtime in Frankfurt.

"The world is a liquidity junkie," says Alan Ruskin, strategist at RBS Securities here in London, speaking to the Financial Times.

"Pretty much every [market] is functioning off the fact that short-term financing costs across the G7 [economies] are about as close to zero as they ever will be. It creates an incentive to take on risk all over the map." (Read more about this über-Reflation Rally Redux here...)

"There is still a clear disparity between speculative activity in the gold market and what we observe in the physical market," writes Walter de Wet, senior commodities analyst at Standard Bank, today.

"Speculative activity remains high on the back of Dollar weakness. [But] over the past two weeks, we continued to witness a very weak physical market and continue to see scrap flowing to the market at current price levels."

Open interest in US gold futures and options rose last week to its greatest level since the previous all-time peak in the gold price, hit at $1032 when Bear Stearns collapsed in mid-March last year.

Totaling more than 670,000 contracts, however, it's the outstanding sum of all positions that now shows the strongest correlation with moves in the gold price, a change from the average position of the last five years.

Showing what statisticians call an "r-squared" of 58% on average since New Year's 2009 – and rising to 92% last week – the connection between gold prices and the total number of all gold derivatives now outweighs the connection with the "net long" position held by large speculators such as hedge funds.

That currently shows an r-squared of 54% for 2009-to-date. Last week's data gives it a reading of 90%.

Since the start of 2004, in contrast, the volume of "hot money" typically moves more closely in line with prices than does open interest, giving an r-squared of 13% on average. The total number of contracts outstanding shows a long-term relationship of 9%.

"Gold closer to $1,030 might see physical buying return," says de Wet at Standard Bank. "[But] while we still believe gold could reach $1,100 in Q4:09, we are increasingly seeing strong resistance from the physical market."

Leveraged speculators in the futures market "expect the rally to continue" according to Bloomberg News, meantime, because the most heavily-owned futures contract last week was the December contract to buy metal at $1200 an ounce.

But while leverage is available at record-low cost to financial players, credit conditions remain tight for Western households.

Data from the New York Federal Reserve shows default rates on mortgages, bank cards and auto loans rising in all regions of the United States.

"While consumer credit trends are improving in international markets, the US consumer credit environment remains challenging," said Citigroup chairman Vikram Pandit when he announced a $3 billion loss at the banking giant – now one-third owned by the Treasury – last week.

Toys R Us, the global toy-shop chain, said today it's launching a "layaway program" for US consumers, offering staggered payment terms on big-ticket items such as bicycles ahead of Christmas.

US department store Sears introduced a layaway program for Christmas '08, reports the Associated Press. K-Mart introduced a layaway option to online shoppers this year.

Here in London, meantime, City watchdog the Financial Services Authority (FSA) announced its new mortgage regulation plan, banning all "self-certification" mortgages and high loan-to-value mortgages for poor-credit borrowers.

"[It's] ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers," responded the UK Council of Mortgage Lenders earlier, "they are also keen to take steps to address the perception of 'irresponsible' lending."

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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