Gold Bounces as European Stocks Rally; Asia-Pacific Ends the Week 10% Down

By: Adrian_Ash

SPOT GOLD PRICES rose at the London opening on Friday, recovering the overnight bounce above $653 before slipping to $651.56 per ounce by lunchtime – a little more than 1% above Thursday's low.

European stock markets also rose despite a torrid session in Asia , bouncing 0.7% on average as London 's FTSE regained 1.4% and France 's Cac 40 put on 0.9% from Thursday's close.

Germany 's Dax was flat, while US Treasury bonds held steady as the US Dollar slipped 0.6% to $1.3440 per Euro, its first sizeable pullback in more than a week.

"Capital flight is hurting gold," says Phil Smith for Reuters India of Thursday's $20 sell-off in Gold Bullion Prices, "with the price dropping sharply through two major supports at the 200-day moving average and the long-term trendline on the weekly chart.

"Some interim support is pegged at the June low," he adds, pointing to the level of $638.90 per ounce in the Gold Market.

Overnight, Asian equities were sold hard yet again. The Nikkei 225 index in Tokyo finished more than 5.3% lower; the Bombay stock market dropped 4.4%; South Korea 's Kospi index – the world's busiest stock market for traders using borrowed money – dropped another 2.2%.

All told, today's losses took the drop in the MSCI Asia-Pacific equity index drop to more than 10% for the week as a whole.

In the gold market, Tokyo's most-actively traded gold futures contract dropped 'limit down' for a loss of ¥120 per gram – some 4.7% – as the Japanese Yen continued to rise against all other assets. Hitting a 14-month high versus the Dollar at the European open, the Yen briefly spiked to ¥220 per Pound and ¥150 per Euro – a gain of nearly 10% since Wednesday last week.

Tocom gold futures for delivery in June '08 ended the week equivalent to $652.42 per ounce. Comex gold futures for Dec. '07 then gained nearly $5 in early London trade to $662.90 per ounce. The Price of Gold Versus Euros broke above €486 per ounce before ticking down €1.50 by lunchtime in Frankfurt to stand 0.8% above yesterday's low.

"You're facing a serious and under-appreciated global liquidity crisis," reckons Zachary Oxman, a senior trader at Wisdom Financial in the US . "Right now, parties are all running for the door to get any and all the cash that they possibly can on their books to cover calls and redemptions."

US crude oil futures failed to bounce early Friday after dropping $2.33 per barrel to $70.10, down more than 11% from the record high hit on the first day of August.

Thursday also saw silver lose 8% of its Dollar price, while copper dropped 7% and palladium lost 6% according to a MarketWatch report.

"The current volatility in gold is very disturbing. This is forcing investors to sell gold, platinum and other commodities heavily," said Shuji Sugata, a manager at Mitsubishi Futures and Securities in Tokyo to Reuters earlier. Standard Bank in Johannesburg adds that "risk aversion is evidenced by continued demand for US government bonds, driving the 10-year yield down to 4.64%, ten basis points lower than at the start of the week.

"[But] there are no major data releases out in the US today," the technical note continues, "which might be good news, as it might allow markets to settle. However, the ECB's Webber and Fed's Poole are both due to speak today, and they will hopefully calm fears of a major meltdown in economic growth."

French president Nicolas Sarkozy waded into the "meltdown" debate meantime, writing an open letter to Angela Merkel – German chancellor and acting president of the G8 group of industrialized nations – in which he says: "I believe it is essential that as heads of state we should draw the consequences and lessons of the events that are affecting the markets."

Cutting interest rates to revive global asset prices may not be politically feasible, however. "Upward pressure appears evident in the core US consumer price index," says Marc Chandler, chief currency strategist for Brown Brothers Harriman in New York , "and that must be troubling."

Core CPI excludes volatile food and fuel prices, but it has still been rising at 2.5% annualized for the past three months. "Over the next four months, both the headline and the core rate will rise due to base effects," adds Gabriel Stein, an economist at Lombard Street Research in London .

"Continued domestic and inflationary pressures should stay the Fed's hand for now," Stein believes. But whether the Fed chooses to cut rates or stick, higher inflation would still result in a lower real rate of interest – and when US real rates last turned negative, between 2003 and 2005, the Dollar price of gold rose by one third.

During the negative real rates of 1975-80, matched by a bear market in stocks and bonds, the Dollar gold price quadrupled.

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 2007

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