Gold Drops to Three-Session Low as Stock Markets Sag; Dollar Still "Very Weak" Ahead of US Housing Data

By: Adrian_Ash

SPOT GOLD PRICES slipped 0.9% to a three-session low of $724 per ounce Tuesday morning in London , while European stock markets dropped 1.2% and Wall Street futures pointed lower.

On the currency markets, the Dollar bounced meantime – even though consumer confidence and housing data due at 10:00 EST were expected to show a marked decline.

"We had a terrific move on the upside and the gold market got itself long," reckons David Holmes at Dresdner Kleinwort in London . "I think people are beginning to take profits

"[But] we are still in a very weak Dollar environment and theoretically, you could even try and push gold to new highs."

After the release of Aug.'s existing home sales data today – together with US consumer confidence – Wednesday will bring Durable Goods orders, followed on Thursday by new home sales data and then business sentiment on Friday.

Anticipating further Fed interest-rate cuts in response to the weakening US economy, Treasury bond prices ticked higher early Tuesday, pushing the 10-year yield four points lower to 4.59%, while Wall Street futures pointed lower.

Dow futures sagged 48 points after Lennar, the major US homebuilder, reported a loss of $3.25 per share for the three months ending Aug. 31st. The same period in 2006 delivered net income of $1.30.

Lennar cut its payroll by more than one-third over this summer. Wolseley – the world's largest distributor of plumbing equipment – said yesterday that trading profits at Stock, its US division, fell 77% in the year to end-June.

According to Moody's, the global credit-ratings agency, "losses on the most recent [ US mortgage-backed] securitizations are likely to continue growing in the near-term." Default rates for subprime US mortgages taken out in late 2006 are now running at 3.5%, nearly four times the rate seen on mortgages originating in 2002-2005.

"I have to say underlying sentiment [in the Gold Market ] remains strong," said Tatsuo Kageyama at Kanetsu Asset Management in Tokyo to Reuters earlier, "with the Dollar bearish and the outlook of the US economy looking unclear.

"[But] the pitch of the rise has been too fast. Gold has been overbought and it's about time to see a major correction."

It wasn't just the Gold Price which pulled back against the ailing Dollar on Tuesday morning. The European single currency traded below $1.41 after the Ifo index of German business sentiment showed a sharp fall to the lowest levels since early last year. The British Pound fell below $2.01, down from Monday's early peak above $2.03, on news from London that the Financial Compensation Scheme for UK bank-deposit savers now stands at just £4.4 million ($8.8m).

The equivalent fund in the United States is worth $49 billion – some 5,000 times greater for a population only five times larger.

"If true, this increases the probability that the government will change its previously hands-off approach to the UK financial sector," reckons David Woo at Barclays Capital. "We think that the market-friendly approach of UK authorities has supported the pound over the past decade.

What's more, "this is negative news about the UK financial sector at a time of great nervousness" following the run on Northern Rock two weeks ago, Woo added.

But by 12:30 in London today, the Gold Price in Sterling had dipped below £360 per ounce for the first time in a week, slipping 1% from Monday's start.

The Gold Price in Euros also pulled back, dropping to its lowest level since Monday last week at €513.50 per ounce.

Comex gold futures for Dec. delivery also slid, down to $734.30 per ounce in pre-US trade and nearly 2% off Friday's near three-decade high.

Earlier in Tokyo , where traders got back to work today after a long holiday weekend, the Tocom's most-active gold futures contract closed 1.4% lower. The Nikkei stock index added 0.6% for the day.

"Gold has basically come off on a stronger Dollar and weaker oil price," said David Davis in Johannesburg for Credit Suisse to Bloomberg earlier, as crude oil prices continued to slip for the third day running – down to within 10 cents of $80 per barrel.

"There are currently no hurricanes, no bad geopolitical news, more OPEC oil on the horizon and no cold weather yet," added a London trader.

But oil prices are "more likely to rise to $100 than to drop to $60 a barrel in the near-term" says a report today from Merrill Lynch. It points to further possible storms and fresh geo-political turmoil.

The militant Nigerian group, MEND, just announced it will resume kidnaps and attacks on oil facilities after the arrest of one of its leaders, the first such threat since a cease-fire announced at the start of June.

Further ahead, "Demand is up and supply is flat, so oil's got to go on up," said T.Boone Pickens, the legendary Texan oil magnate, in an interview late last week.

Pickens believes the world will see $100 early in 2008.

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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