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Gold Falls with Stocks, Crude Oil and Bonds

Commodities / Gold & Silver 2009 Oct 21, 2009 - 08:15 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD fell hard as the US Dollar bounced in London trade Wednesday morning, dropping back to $1050 an ounce.

World stock markets also fell, down 1.0% from Tuesday's new 2009 highs, while crude oil slipped $1 per barrel from yesterday's 12-month highs above $80.


Government bonds also fell, pushing yields higher.

The Gold Price in Sterling meantime slumped to a two-week low of £634 an ounce – more than 6% below last week's near-record high – as the British Pound rose on news the Bank of England voted unanimously at the start of this month to maintain, but not extend, its Quantitative Easing program.

"Support at $1042 provides the bottom for [Gold] for now," says one London dealer in a note.

"Resistance lies at the previous high of $1072, with plenty of talk of option-related barriers at $1075."

"Gold scrap is still entering the market," says Standard Bank's Commodities Daily, "and gold is meeting strong resistance on approach of $1,070.

"Should the Dollar show a bit more strength, there could be a downward correction towards $1,040 in the Gold Price...However, buying price dips remains our strategy.

"The most important driver of the Gold Price is the real Fed [interest] rate," says Andrew Garthwaite, equity strategist at Credit Suisse in London, in a new report.

"If the inflation-adjusted Fed Funds rate is below 2%, the Gold Price tends to rise."

Low to negative real rates of interest are the common denominator between this decade's four-fold rise in Gold and the massive bull run of the 1970s.

Yesterday Janet Yellen, policy-making president of the San Francisco Fed, told reporters that "[raising rates] is not something I anticipate happening over the next several months. Certainly not."

Adjusted for inflation, the Federal Reserve's target rate has averaged just 0.4% so far this decade. That compares with an average of 3.3% during the 1980s and '90s.

Gold lost four-fifths of purchasing power over that time. US equities rose 15 times over.

"There is nothing to make me say gold shouldn't be trading somewhere between $750 and $850 over the next 12 months," reckons Nicholas Koutsoftas, a portfolio manager at General Electric's $40 billion pension fund, speaking to Reuters.

GE's pension fund currently holds less than 1% of assets in commodities.

"Gold is one commodity which I have a hard time trying to derive a proper valuation for, based on its non-fundamental factors. It is viewed as a hedge against a weak US Dollar, or rising inflation.

"We use the marginal cost of supply as a measure to understand a commodity's fair value, and with gold, the marginal cost of supply is significantly lower than the $1,000 an ounce gold is currently trading above."

The chairmen of Shandong Gold, Shandong Zhaojin and China National Gold Group Corp – which accounts for one-fifth of China's annual output – said they plan to increase investment, want to improve mining technology, and expect price to continue rising amid the current "financial tsunami".

Leaders from three of China's largest Gold Miners all pointed to higher prices ahead on the second day of a conference in Tianjin on Tuesday, reports John Chadwick of International Mining magazine at Mineweb today.

Now the world's No.1 producer of newly-mined gold, China overtook India as the No.1 private buyer during the first 6 months of this year.

"Currently, China and Japan, which together control 43% of foreign exchange reserves, have only 2% of their reserves in gold, while Russia holds 4% of its reserves in gold," writes Garthwaite at Credit Suisse. "This contrasts with Europe and the US where 70% and 79% of reserves are in gold respectively.

"Were Japan and China to decide to hold 10% of their reserves in gold, we calculate they would have to buy $250bn worth of gold – which at the current price of $1,050 is equivalent to 6,700 tonnes, or 2.8 times annual gold mine supply."

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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