Gold Bounces From 5% Plunge

By: Adrian_Ash

THE PRICE OF PHYSICAL gold sank in late Asian dealing on Friday, losing 4.7% from Thursday morning's new all-time highs but quickly recovering one-third of that loss as London trading began.

"We would buy this dip," wrote Walter de Wet at Standard Bank as gold rose back through $1150.

Today's AM Gold Fix in London – used as a clearing and reference price worldwide – was then set at $1164.50, a five-session low.

"We still see support in the physical market," de Wet explains. "We also believe the renewed focus on credit risk, combined with ample liquidity, should keep investment demand for gold high."

Looking ahead, however, "We remain mindful of what can happen in February/March...a very weak period for seasonal demand. From what we saw at the start of 2009, physical selling could be intense."

Gold's drop – its fastest move since mid-March – mapped sharp falls in Asian stock markets that extended yesterday's broad financial sell-off after the Dubai government requested a "debt freeze" for one of its state-owned real-estate investment firms.

Tokyo's Nikkei lost 3.2% on Friday. Seoul was down 4.7%, Hong Kong 4.8%, and Shanghai 2.4%.

The US Dollar jumped more than 2% on the forex market, meantime, bouncing hard from 15-month lows to the Euro and a fresh 14-year low to the Yen.

Typically moving in opposition to Tokyo stock prices, the "safe haven" Japanese currency gained some 2.5% against the higher-yielding Euro, Aussie and Canadian Dollars, and British Pound.

"There was good offer above $1195 which kept a lid on gold," said one Hong Kong dealer's note this morning.

"Liquidity was pretty poor...probably due to New York holiday and traders switching [from Dec. to Jan.] future month."

This week's expiry of December gold options at the Comex in New York saw a position worth 93 tonnes – equal to 13 days of global mining production – fail to achieve its price-target of $1200 an ounce.

Latest data from US regulator the Commodity Futures Trading Commission said that last week speculative futures and options traders were "net long" of some 970 tonnes – almost twice the 5-year average.

"Our intervention in Dubai World was carefully planned and reflects its specific financial position," said Sheikh Ahmed bin Saeed al-Maktoum, head of the city's Supreme Fiscal Committee, in a statement aimed at reassuring creditors of the United Arab Emirates' other state-backed companies last night.

"The Dollar's rally was to be expected" on Thursday's debt freeze request at Dubai World, writes Steven Barrow at Standard Bank this morning. A sharp widening of bid/offer spreads on corporate and government bonds worldwide was also no surprise, he says.

"But if credit spreads continue to widen, we'd question the ability of the Euro to make [further] gains...In June 2009, global banks had international loans of just over US$32 trillion outstanding. Almost half of this is owed to Eurozone banks. [So] when non-domestic credit problems arise, they are more likely to affect Eurozone banks than those in the US."

Averaging almost +0.50 over the last 10 years, the daily correlation between gold and the Euro vs. US Dollars shows a strong statistical significance, with the single currency and bullion typically moving together against the greenback.

The correlation coefficient would stand at +1.0 if the Euro and gold moved in lockstep. If they always moved in perfect opposition, it would read -1.0.

On a rolling one-month basis, the correlation between gold and Euros tends to decline when the single currency falls against the Dollar, turning negative during gold's strong bull runs of late 2005 and early 2009.

"There is no doubt that the [currency] market has moved too far in one direction," said Hirohisa Fujii, Japanese finance minister, to reporters in Tokyo today.

"Moves right now [in USD/JPY] are extreme, and it would be possible to take appropriate measures," he added – taken to mean central-bank intervention to support the Dollar by selling Yen on the foreign exchanges.

"I would respond flexibly to a joint [G7] statement on currencies."

Gold priced in Japanese Yen sank more than 6% this morning from Thursday's early 26-year highs, but swiftly bounced back above ¥3200 per gram, regaining well over a third of its drop.

The gold price in both Euros and Sterling dumped 3.7% before turning higher, only briefly dipping below €768 and £700 an ounce respectively.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly 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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