Gold Slips to $1100 as UK Faces Potential Credit Ratings Downgrade
Commodities / Gold & Silver 2009 Nov 10, 2009 - 07:43 AMBy: Adrian_Ash
THE PRICE OF WHOLESALE gold slipped 1% from Monday's new record high early in London today, briefly drifting through $1100 an ounce as Asian stock markets closed the day higher but European shares held flat.
Crude oil ticked back down to $80 per barrel, but remained higher by one-third from this time last year.
The US Dollar held steady after Monday's sharp losses. Ten-year Treasury bonds offered 3.45% in yield.
"A correction is reasonable after [gold's] run-up from around $1030 in a little over a week," a researcher at Tokyo commodity brokers Okato Shoji Co. told Reuters this morning.
"Gold will keep looking north...benefiting from the world of a zero-yielding Dollar.
"Some people buy higher-yielding currencies, such as Australian and New Zealand Dollars. Others prefer buying gold without taking currency risks."
Both Japan's Eco-Watchers survey and Germany's ZEW sentiment index today came in well below analyst forecasts for October.
Fitch Ratings identified the UK as "potentially most at risk" of a downgrade to its government bonds because it faces the greatest need to adjust its public finances.
"Current prime minister Gordon Brown is largely responsible for the underlying budget problem," says Martin Hutchinson at Prudent Bear.
"[But] the opposition Conservatives, likely to take power next spring, are led by a center-leftist with a background in public relations and no discernable backbone or principles."
UK gilts ticked higher but the British Pound dropped 2.5¢ from Monday's three-month high on the Fitch report, bouncing higher from $1.66 to the Dollar.
That capped the gold price in Sterling just below a one-month high near £663 an ounce.
The gold price in Euros held below €735 as the single currency crept higher above $1.50.
"I'm in the bullish [gold] camp," says Neil Clift, managing director of J.P.Morgan Chase's precious metals division in London, but "No matter how strong fundamentals are, when something just goes in one direction...it has to reverse at some point.
"We'll see people coming in to sell options...It may be a long time before that happens. At the moment the [gold] market is in bullish mode and I actually am probably more a bull than most."
Also noting the current record bullish position now held by speculative players in the US gold futures and options market – and also speaking to Dow Jones Newswires – Jeffrey Christian of New York's CPM consultancy says large investors holding gold for the long term may look to "hedge" their positions against a possible dip.
"If they did sell, they will accentuate the decline in prices."
Clift, a speaker at last week's LBMA conference in Edinburgh, notes that the US options market currently puts a 1-in-4 chance on gold reaching $1400 an ounce by the end of 2010.
Merrill Lynch analysts led by Francisco Blanch say gold prices could hit $1500 in the next 18 months, due to "the unintended consequence of the ongoing financial bailout –inflationary pressures to the commodity markets."
"Our consistent suggestions is that investors consider a maximum 10% allocation to gold – half of the exposure in Bullion and the other half in gold mining equities," says Frank Holmes, CEO and chief investment officer at US Global Investors, the boutique advisory running $2.4 billion in assets.
"The vote of confidence by a serious [gold] buyer like India may make a good situation even better."
On the political front early Tuesday, North and South Korea confirmed their navies had exchanged fire near a disputed sea border close to the peninsular.
In the Eurozone, Italy reported its worst drop in industrial output sine records began in 1990, down 5.3% in Sept.
The European Commission said it will reprehend the Greek government for allowing its 2009 budget deficit to swell from 3% to 12.7% of the annual economy.
All 27 member states except Bulgaria will exceed the 3% limit this year, Bloomberg reports.
Here in London, meantime, Lloyds TSB – now 43% owned by the state and forced by the European Commission to sell off hundreds of bank branches to comply with competition rule after buying failed mortgage lender HBOS late last year – today announced 5,000 job losses.
Barclays Bank, the only major UK bank to avoid taking government aid amid the 2008/9 banking crisis, posted a 54% fall in its net profits for the third quarter.
Its investment banking division, Barclays Capital, reported pre-tax profits for the first nine month of 2009 at £2.7 billion.
By Adrian Ash
BullionVault.com
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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
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