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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Commodity Markets Analysis - Gold Looks Set to Challenge $700

Commodities / Gold & Silver Sep 05, 2007 - 08:25 AM GMT

By: Gold_Investments

Commodities Gold
Spot gold was trading at $679.50/680.00 an ounce as of 1215 GMT.

Gold has traded sideways to slightly down in Asian and European trading after yesterday's strong performance with gold rallying 1.3% to $682.30.


Gold easily took out the resistance at $675 and looks likely to challenge the psychologically important $700 in the coming weeks.

This is especially the case with the very robust physical demand internationally and the continuing decline in gold supply. Gold output fell in South Africa, the world's largest producer, by a very significant 7.5% in the second quarter versus the same period last year due to lower grades, the SA Chamber of Mines said yesterday. This follows similar falls in other gold producers and China is the only gold producer who has managed to increase production significantly in the last year despite higher gold prices.

This confirms that last Friday's third highest monthly close for gold ever is no flash in the pan rather a strong secular bull market based on strong technical and more importantly fundamental factors. A massive base has been built in recent months with smart money accumulating on the dips and we look likely to soon see the next leg up in this secular gold bull market.

Liquidity Crisis Continues
There are further signs that the global liquidity crunch is far from over. The FT reports that capital markets face a critical period, which will determine how the financial system copes with this summer's credit sector “heart attack”, a senior international banker warned on Tuesday. Hans Jörg Rudloff, chairman of Barclays Capital, said the next four to six weeks would be crucial as investors tried to establish new price levels for risk and banks expanded balance sheets to take on assets held by stricken investment vehicles.
“This is the big question: are we capable of establishing a new price level for these assets? If we stay stuck, the patient is going to die,” Mr Rudloff said in a speech to Russian executives in Moscow.

The money markets are notably failing to offer any reassurance. While the tone of equity markets has calmed, the sense of crisis in the interbank markets actually appears to be growing -- especially in London. In particular, the cost of borrowing funds in the three-month money markets -- as illustrated by measures such as sterling Libor or Euribor -- is continuing to rise, suggesting a frantic scramble for liquidity among financial groups.This trend is deeply unnerving for policymakers and investors alike, not least because it is occurring even though the European Central Bank and the US Federal Reserve have taken repeated steps in recent weeks to calm down the money markets. "What is happening right now suggests that the moves by the Fed and ECB just haven't worked as we hoped," admits one senior international policymaker. Or as UniCredit analysts say: "The interbank lending business has broken down almost completely. ... It is a global phenomena and not restricted to just the euro and dollar markets."

If this situation continues, it could potentially have very serious implications.

In a related development, the Wall Street Journal says in a report today that though few investors realize it, banks such as Citigroup Inc. could find themselves burdened by affiliated investment vehicles that issue tens of billions of dollars in short-term debt known as commercial paper.

The investment vehicles, known as "conduits" and SIVs (which stands for Structured Investment Vehicles), are designed to operate separately from the banks and off their balance sheets.

Citigroup, for example, owns about 25% of the market for SIVs, representing nearly $100 billion of assets under management. The largest Citigroup SIV is Centauri Corp., which had $21 billion in outstanding debt as of February 2007, according to a Citigroup research report. There is no mention of Centauri in its 2006 annual filing with the Securities and Exchange Commission.

Yet some investors worry that if vehicles such as Centauri stumble, either failing to sell commercial paper or suffering severe losses in the assets it holds, Citibank could wind up having to help by lending funds to keep the vehicle operating or even taking on some losses.

Silver
Spot silver is trading at $12.21/12.23 an ounce (1215 GMT).

PGMs
Platinum was trading at $1272/1277 (1215 GMT).
Spot palladium was trading at $330/334 an ounce (1215 GMT).

Oil
Light, sweet crude for October delivery was down 2 cents at US$75.06 a barrel by 1200 GMT in European electronic trading on the New York Mercantile Exchange. A U.S. hurricane expert Tuesday predicted that five more hurricanes are likely this season. Two of the hurricanes would be major, said Colorado State University forecaster William Gray.

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