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Gold Hits Four-Week High; Credit Crunch "Barely Begun" for German Banks

Commodities / Credit Crunch Sep 04, 2007 - 08:45 AM GMT

By: Adrian_Ash

Commodities

SPOT GOLD PRICES rose steadily against the US Dollar in early London trade, nearing a four-week high of $675 per ounce as Wall Street got back to work after Labor Day.

The metal also touched new three-week highs against the Euro and British Pound, but it held flat versus the Yen as the Japanese currency – source of $1,050 billion in lending by the end of April according to a new report from Bank for International Settlements – rose in the forex market.


Earlier the Nikkei stock index in Tokyo had ended the day 0.6% lower, while European stock markets dipped as a Tube strike paralyzed central London . US stock futures pointed lower as the opening bell approached.

"Sentiment [in the Gold Market ] remains firm following Friday's break through $670," says Brandon Lloyd for Mitsui in Sydney , "with attention focusing on today's US manufacturing release. If this prints below 50, the market will probably place the manufacturing sector into the same basket as the US housing sector!"

Wall Street analysts expect the ISM Manufacturing Index for Aug. – due for release at 09:00 EST – to come in at 53, down from July's reading of 53.8. Any reading below 50 signal a contraction in activity.

"This [would] put further pressure on the US Dollar," says Lloyd, "and increase the chances of Gold Prices trading through the next resistance target at $676.50. The biggest risk to gold in the short term however, remains the potential Central Bank gold sales in the lead up to the end of the third year of the current five-year gold agreement on September 28."

First signed in 1999, the Central Bank Gold Agreement allows for the central banks of Western Europe to sell a total 500 tonnes of bullion between them each year. In the CBGA year to date, official data show, the CBGA members remain more than 100 tonnes short of this quota, despite record gold sales by the Banco d'Espana starting in Feb. The cash raised, many analysts believe, has been needed to help cover Spain 's yawning 9% trade deficit.

"Central banks recent behavior directly in the gold market has also been a cause for some calm," notes Wolfgang Wrzesniok in the latest previous metals report from Heraeus, the German refining giant. "They have held back sales significantly [during the stock and money market turmoil of Aug.], and only a sale of about a tonne was announced last week."

On the other side of the trade, "this low sales volume in the past few days was more than met by physical demand from private investors and some stock-building by jewelers," Wrzesniok goes on. "Even the US-investments funds, till very recently regular sellers, were buyers who added slightly to their long positions."

By Tuesday's close in Tokyo , gold futures traded at the Tocom were little changed. Gold for delivery in Aug. '08 ended the day equal to nearly $686 per ounce, as the Japanese currency pushed down the Dollar by half-a-yen to ¥115.30, the bottom of its trading range over the last four sessions.

The European single currency dipped below ¥157.00 and slipped beneath $1.3600 for the first time since US president Bush and Fed chairman Bernanke assured the world on Friday that they will act "as needed" to prevent the collapse of subprime mortgage values spreading to the broader economy. ( To find out what acting "as needed" might mean for gold, click here and read on... )

Germany 's IKB bank yesterday said it will post a loss of perhaps €700 million ($953 million) as a result of its failed US mortgage-bond investments. Three predatory takeover bid are rumored for Landesbank WestLB, another German bank hit by the US subprime collapse. The weekly Wirtschaftswoche newspaper warns that the credit crunch now hitting German banks has barely begun. Josef Ackermann, head of Deutsche Bank, today tried to downplay the impact of the subprime sector's collapse after the bank was forced to close its proprietary credit trading desk last week with losses of €100 million ($136 million).

"The damage on European banks may spread," reckons Ryohei Muramatsu at Commerzbank in Tokyo . "The European Central Bank is unlikely to hike rates [on Thurs] amid the current situation. It's a negative for the Euro."

The European Central Bank is forecast to remain on hold by 44 out of 55 economists interviewed by Bloomberg News, and this morning's resulting dip in the European currency helped take the Euro Price of Gold up to a new three-week high above €496.50 per ounce by lunchtime in Frankfurt.

Gold Priced in Sterling began the day in London little changed from Monday's start, itself a three-month high for the weekly opening, but it rose above £335 bid as the British Pound dipped below $2.0150 in the forex market, driven lower in anticipation of a "no change" decision when the Bank of England also meets to set UK interest rates on Thursday.

Meantime in India , the world's hungriest market for physical gold, the pick-up in gold demand is quickening its pace, according to the Economic Times.

Tejas Parekh, senior researcher at Motilal Oswal Commodities in Mumbai, says that as the festival and wedding seasons continue, "those who have to fabricate jewelry would be buying now." Philip Olden, chief marketing officer of the World Gold Council's local office, compares India 's growing demand with the gold-mining industry's ongoing exploration and production problems.

India 's gold demand "has made a substantial recovery in Q2 2007 from the impact of the volatile prices experienced in 2006," he told the Economic Times overnight, "rising 19% in tonnage terms [for] a 27% increase in value terms year-on-year."

Looking ahead, "there is a 30% increase in demand for gold globally [but] the supply is stagnant," he said. "This may firm up prices."

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 2007

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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