Gold Plunges to 2 Week Low as U.S. Dollar and Yen Push Higher

By: Adrian_Ash

GOLD PRICES fell Tuesday lunchtime in London, unwinding an earlier rise made against all currencies bar the US Dollar and Japanese Yen, which then knocked gold bullion back to two-week lows at $1345 per ounce and ¥3530 per gram respectively.

European stock markets also slipped, while US crude oil fell back below $82 per barrel.

Silver prices dropped below $24 per ounce for the second day running.

"A deluge of monetary policy makers give their opinions on the economy this afternoon," notes one London gold dealer in a note, as the European Central Bank hosts a conference in Frankfurt, with speeches from ECB chief Jean-Claude Trichet, Bundesbank president Axel Weber, and new US Fed voting member Janet Yellen.

Bank of England governor Mervyn King is on a tour of England's West Midlands manufacturing district – a trip which "may well decide" the BoE's next round of quantitative easing, according to the Wall Street Journal.

Five bank presidents from the Federal Reserve – as well as chairman Ben Bernanke – are then scheduled to speak in the US.

"No country...can devalue its way to prosperity, to [be] competitive," said US Treasury secretary Tim Geithner to the Commonwealth Club of California in Palo Alto on Monday. "It is not a viable, feasible strategy and we will not engage in it.

"It is not going to happen in this country."

Since Geithner took office in Jan. 2009, the US Dollar has lost 10% of its value against the world's other leading currencies, and dropped more than one-third of its value against gold bullion.

In London trading this morning, gold re-touched last week's 1-month high against the Euro currency, and came within £2.80 of June's record-high for UK investors, touching £868 per ounce.

US, German and UK government bonds fell, meantime, nudging the yield offered by 10-year British gilts back above 3.00%.

"We need to give careful consideration to the matter of increasing gold volumes in our foreign reserves," said South Korean central bank governor Kim Choong-soo to a parliamentary committee in Seoul meantime.

South Korea currently holds just 0.2% of its $290 billion reserves in gold bullion, notes the Financial Times. The world average is nearer 10%.

Short-term, "Gold is likely to continue the rally before the Federal Reserve meeting in early November," reckons Zhu Yilin of Jingyi Futures in Shanghai, speaking to Reuters this morning.

But "Unless the Fed announces quantitative easing to a huge extent, gold will retrace. It's all about anticipation. Once the result is out, it's time to close positions." 

After poor US manufacturing data dented the Dollar – and buoyed gold – late Monday, "[More] disappointing numbers might raise investors' expectations of further [monetary] accommodation and consequently send precious metal prices higher," says Walter de Wet at Standard Bank today.

But "we remain cautious on gold post-5 November. The risk remains that the Fed could disappoint in the size of QE...Seasonal jewelry demand should [also] fall away in November" after the Hindu festival of Diwali is celebrated in India, the world's  No.1 consumer market for physical gold.

Silver bullion's "steep ascent is [also] expected to lose upside momentum," writes technical analyst Axel Rudolph at Commerzbank today.

Despite silver prices looking "long-term bullish" after breaking both a downtrend begun in 2008 and the Sept. 1980 high of $24.25 per ounce, "Seasonality points towards a consolidation," says Rudolph.

"Five and 25-year seasonality shows October to be a month in which the silver price tends to consolidate."

Crunching numbers from the latest US futures' market data, the VM Group here in London notes that speculative traders cut their bullish betting on silver prices at the fastest pace since mid-July last week.

"Investors in silver ETFs continued to pile in, however, pushing total investment up to a fresh high."

By Adrian Ash

BullionVault.com

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Formerly 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 2010

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