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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Continues to Consolidate After Recent Rally

Commodities / Gold & Silver Sep 14, 2007 - 10:22 AM GMT

By: Gold_Investments

Commodities Gold
Spot gold was trading at $706.00/706.50 an ounce as of 1215 GMT after yesterday's 0.5% price decrease.

As anticipated, gold has continued to consolidate after its recent price surge. None of the fundamental factors which led to gold's recent price surge have gone away. Oil and the dollar remain near record highs and lows respectively. The U.S. dollar is trading at 79.61 at 1200 GMT and has clearly broken down below massive long term support at 80. It is now in uncharted territory technically and with the FOMC meeting next Tuesday expected to result in a drop of at least 25 basis points, the USD looks likely to remain under serious selling pressure.


Increasing global systemic risk is again evident in the news that Northern Rock, the UK's 5th largest mortgage lender is in trouble and is being bailed out by the Bank of England. The BoE is now the "lender of last resort" after Northern Rock had difficulties raising cash from the commercial markets. Northern Rock has been the hardest-hit UK lender as it relies on wholesale markets far more than competitors for its funding requirements.

Northern Rock has a £75 million direct exposure to the U.S. sub-prime market and £200m further exposure within U.S. money markets, some of which has been lent on to sub-prime borrowers. Credit rating agencies have given much of the debt AAA rating however credit ratings of asset backed securities are obviously open to question. NR are solvent right now but NR is more of a mortgage broker than a bank and many large and trusted mortgage brokers have gone bust in the U.S. Safe haven buying is increasing.

Gold rallied above £350 GBP with sterling selling off and the FTSE down 2% at 1215 GMT.
(For more on the effect of the developing Northern Rock problems and their affect on GBP see Forex and Gold below).

Forex and Gold
Following yesterday's drop to a new lifetime low versus the euro at $1.3927, the dollar recovered slightly overnight. However, it remains close to 15 year lows against a basket of currencies as markets await the release of some key U.S. data later today. August's retail sales at 1330 GMT will be watched for any signs that the problems in the housing markets are spilling over to other areas of the economy.

The data are expected to show sales up 0.4% on the month. A good number may provide some support for the dollar going into the weekend but, at the same time, is unlikely to change the markets' view that U.S. interest rates will be cut at next Tuesday's FOMC meeting. Other U.S. data to watch today include business inventories for July, industrial production for August and the Michigan preliminary sentiment survey for September.

Sterling has been sold versus other majors on reports that Northern Rock is to get emergency support from the Bank of England, as it struggles to raise funds in the current climate. Cable is back trading below $2.02, while against the euro, sterling is sticking close to four month lows. The reports have raised concerns about wider impacts from the credit crisis, further supporting the markets' view that UK interest rates have reached their peak. The news about Northern Rock is also likely to weigh on European equities, particularly financial stocks over the day.

Silver
Spot silver is trading at $12.49/12.51 an ounce (1215 GMT).
Silver has underperformed gold in recent weeks and remains very undervalued. The COMEX Commitment of Traders (COT) report is very bullish for silver and silver should soon play catch up with both gold and the wider commodity complex as its fundamentals are probably stronger than all the other commodities.

PGMs
Platinum was trading at $1290/1294 (1215 GMT).
Spot palladium was trading at $328/333 an ounce (1215 GMT).

Oil
Crude oil for October delivery fell to $79.61 at 1100 GMT in London. Brent crude oil for November settlement was trading at $76.72 a barrel, down 49 cents, on London's ICE Futures exchange.

Gold Investments
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