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Gold and Silver Reverse Dollar Bounce on Profit-Taking

Commodities / Gold and Silver 2010 Oct 26, 2010 - 07:46 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD unwound yesterday's 1.5% gain vs. the Dollar in Asian and London trading on Tuesday, slipping as the US currency recovered from sharp losses against crude oil, world equities and the Euro.

"Gold was well offered" at the start of London trading today, says one dealer.


Silver prices slipped faster, reversing all of Monday's 2.2% rally.

"The selling is profit-taking," reckons Bernard Sin of Swiss refinery MKS's Finance division, speaking to Bloomberg.

"Gold has come so far. In the medium term, the Dollar correlation will continue."

Averaging a daily correlation to the Euro/Dollar exchange rate of virtually zero over the first 9 months of the year, the Dollar price of spot gold now shows a near-perfect correlation of +0.95 with the Euro for Oct. so far.

That number would read +1.0 if they moved precisely in lockstep.

"Strong profit taking" in futures and options, plus falling inflows of money into ETF gold trusts, saw gold investment in the developed world drop by 1% last week according to latest data from London's VM Group consultancy.

Buyers in India, in contrast – still the world's No.1 source of physical gold demand, continuing to outstrip China – are using the pull-back to buy gold ahead of next month's Hindu festivals, according to dealers.

"Trading sentiment turned bullish on emergence of buying by retail customers for upcoming Dhanteras and Diwali festivals, which witness maximum consumption of the precious metals," says the Hindu Times.

Commerzbank analysts reckon Indian gold imports could breach 100 tonnes this month alone, easily matching 2009's total of 340 tonnes.

UBS last week saw its third-highest sales to India so far this year, says metals strategist Edel Tully in a report.

"Physical demand at the levels we saw on Friday is usually an indicator that gold's price trough is very near.

"[Gold buying] should remain healthy."

Back in the West, European stock markets sagged this morning following weak corporate earnings reports.

Swiss investment bank UBS missed third-quarter revenue forecasts by almost one-third, surprising analysts with a pre-tax loss despite the first rise in wealthy-client inflows since 2008.

London's FTSE100 also fell, dropping 0.9% after strong UK growth data – nearly twice analyst forecasts at 0.8% between July and Oct. – meant a "likely delay to a further bout of quantitative easing" by the Bank of England, according to one City economist.

Gilt prices fell, pushing 10-year yields more than 0.12% above last week's new record low of 2.94%.

The Pound jumped towards $1.59, squashing the price for UK investors looking to buy gold below £840 an ounce, just above a 3-week low.

Versus the Euro and Japanese Yen, however, the Pound rose only to 1-week highs.

"If the Dollar is just about fully-priced for more Fed quantitative easing," says Steven Barrow, currency strategist at Standard Bank, "could the market start to look at the next QE domino to fall?

"A figure we hear more and more [for the Bank of England] is £50bn, whether from pressure groups like the British Chamber of Commerce, or private-sector economists. This amounts to 25% of the [outstanding QE] amount...not too dissimilar to the size of QE expected at the Fed.

"If this happens, it could be the Pound that's about to topple."

US central banker Thomas Hoenig – who has voted against every Fed decision so far this year – yesterday called QEII "a dangerous gamble...risk[ing] the next crisis four or five years from now."

By Adrian Ash

BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

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

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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