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Gold Remains at Record 27 Year Highs

Commodities / Gold & Silver Sep 24, 2007 - 08:39 AM GMT

By: Gold_Investments

Commodities Gold
Gold continued to rise Monday after last week's 3% increase.

Gold was up to $734.50/735.00 per ounce against $731.50 in late New York trade on Friday.

It remains at record 27 year highs, the highest since January 1980, when gold reached a record $873 an ounce.

The gold price continues to surge due to record low dollar prices (the USD hit new lows against the EUR this morning at 1.4129) and record high oil prices (oil remains near record highs above $81 per barrel).

Also there is increasing concern regarding the health of the U.S. economy and a clear increase in systemic risk for the first time in many years.

The FT reports that analysts at Goldman Sachs said they expected to see gold prices reach $775 a troy ounce over the next three months and $800 in six months time. “The momentum in the recent rally has been supported by continued gains in ETF exchange traded fund demand and high jewellery demand during the Indian wedding season,” said James Gutman of Goldman Sachs.

While we have warned that gold may succumb to profit taking in the coming days as we are slightly overbought in the short term, there are many precedents for gold continuing to surge prior to a meaningful correction. When gold broke through resistance at $560 to $580 at the end of March 2006 (see chart) it quickly rose to $730 per ounce in just two months before a sharp sell off.

Gold surged by some $150 from previous resistance prior to reaching a top and a profit taking sell off and further period of consolidation between $560 and $700. Thus, gold could, given the length of the consolidation of strong foundation built and the strong fundamentals, act similarly today. Strong resistance has been seen at $700. This resistance has been overcome and we could again rally some $150 to $850 prior to any significant correction.

An indication that the global credit crisis is far from over was seen with European bank stocks declining on concern that the turmoil in the credit markets will hurt investments and erode earnings. Deutsche Bank AG fell for a third day after Reuters reported that Germany's biggest bank may have to write down as much as 1.7 billion euro ($2.4 billion) in leveraged loan commitments. BNP Paribas SA, France's largest bank, also dropped.

Forex and Gold
The USD again hit new all time low against the euro at 1.4129 and analysts see 1.45 as the next level of resistance. The USD has fallen to a new low mark on the U.S. Dollar Index at 78.313.

Market players are keeping a close eye on whether the dollar breaks the all-time low of 78.19 struck on its trade-weighted index in 1992, a level that analysts said would provide a key test of whether the U.S. currency's sell-off deepens or pauses. Should it deepen and the USD sell off more aggressively and sharply there could be some form of international currency crisis.

The U.S. Federal Funds target rate could fall as low as 3 percent as the Federal Reserve continues to ease monetary policy to shore up growth, Bill Gross, chief investment officer at Pacific Investment Management Co, the world's largest bond fund ($104.4 billion) said. "I think what the U.S. economy needs is somewhere in the 2-1/2 to 3 percent real rate of growth. We are down in the 1 to 2 percent category," Gross told CNBC television. "It's going to take interest rates at 1 percent real ... that means somewhere in the 3 percent category. I wouldn't go as low as 3 percent, but 3 to 3.25 percent fed funds rate target looks very real."

Gross also said that European central banks would likely be forced to cut interest rates due to housing bubbles in the U.K., Ireland and Spain. This is very inflationary and gold's inflationary hedge qualities will be realised in a 1970s style low growth and high inflation environment.

Spot silver is trading at $13.60/13.62 (1200 GMT).

Platinum was trading at $1332/1336 (1200 GMT).
Spot palladium was trading at $338/344 an ounce (1200 GMT).

Oil prices eased Monday but remain near record highs above $81 per barrel.

Reuters reported that the surge in oil prices to record highs will shield OPEC nations, some of which peg their currencies to the U.S. dollar, from current dollar weakness, a Saudi newspaper quoted OPEC sources as saying on Saturday. OPEC members have no immediate plans to hold consultations on a rise in oil prices to record peaks above $82 a barrel last week, the al-Riyadh newspaper reported, quoting unnamed OPEC sources it said were well-informed.

The continual mantra of oil bears has been that OPEC can at will open the spigots and this will lead to lower prices. This has proved incorrect in recent years. It seems likely that given the massive global demand, OPEC are producing close to maximum capacity and will not be able to increase production in any meaningful way that would result in lower oil prices.

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