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Gold Speculation Hits Multi-Month Lows, "Correction May Last Longer" Says Faber

Commodities / Gold and Silver 2011 Jan 17, 2011 - 07:25 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD bounced vs. the Dollar in London on Monday morning, trading unchanged from Friday's 8-week closing low at $1361 per ounce as European stock markets and commodities also held flat.

With New York closed for Martin Luther King Day, US Treasury bonds were unchanged but the Dollar whipped around $1.33 to the Euro.


Following Friday's 0.5% rise in China's banking reserve ratio – the seventh rise aimed at stemming credit inflation in the last 12 months – Shanghai's stock market today dropped more 3% after the local municipal government said it will soon launch a property tax.

"China's [banking reserve] move is perceived that the country is capable of slowing down the level of inflation," said Frank McGhee, head precious metals trader at Integrated Brokerage Services, late Friday.

"That takes some of the run of gold and industrial metals such as silver, platinum and palladium."

Silver bullion slipped further on Monday, dropping 1.5% from Friday's 7-week closing low.

Eurozone citizens looking to start gold investing briefly saw the price rise 0.8% to €33,000 per kilo after Madrid today cancelled two new Spanish debt auctions scheduled for Jan., offering the bonds through a group of banks instead and at higher interest rates.

Eurozone finance ministers will meet this evening in Brussels to discuss extending the 17-nation currency region's new cross-border "stabilization fund" bond sales.

"Investors remain preoccupied by the threat of further monetary tightening in China," writes Marc Ground at Standard Bank in London today.

"This is weighing on precious metal prices, encouraged further by a stronger Dollar off the back of lingering Eurozone debt concerns as Greece's credit rating is reduced to junk by Fitch – confirming similar moves by Moody’s and S&P."

Gold investing via the SPDR Gold Trust – the world's largest exchange-traded gold trust – fell 0.5% on Friday according to the fund's bullion holdings, which extended this month's 1% drop to reach the lowest levels since May 2010 at 1259 tonnes.

Institutional speculators had also begun slashing their betting on the US gold futures and options market ahead of Friday's China news, too. In the week-ending last Tuesday night, so-called"Large Speculators" – as a group – cut their bullish betting by 6% according to US regulator the Commodity Futures Trading Commission.

From the recent peak in Oct., these professional speculators cut the number of bullish gold investing contracts they held by almost a quarter. Their "net long" position (of bullish minus bearish bets) fell last week to a 6-month low equivalent to 628 tonnes, and as a percentage of all open contracts, it dropped to a two-year low of 25%.

On the other side of the trade, in contrast, commercial gold-industry players continued cutting their "net short" position last week, taking it more than one-fifth below Oct.'s record high to the lowest level since July 2010.

"The Dollar got oversold [in late 2010] and we may see a rebound," said Swiss money-manager and Thai-based investment author Marc Faber to CNBC-TV18 in India last week.

"[But] the US Dollar and the Euro are weak currencies. I would rather bet on a strong currency like gold.

"Gold, however, has also begun to correct and this correction may last longer."

"The current international currency system is the product of the past," says Chinese president Hu Jintao – who begins a state visit to the US on Tuesday – in written answers prepared for the Wall Street Journal and Washington Post this weekend.

"The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US Dollar should be kept at a reasonable and stable level."

Here in London on Monday, the Bank of England "should hold its nerve" and ignore calls to raise interest rates said consultant Ernst & Young's Item Club.

"If the Bank has been pushed into a rate rise this year, it will find itself with a depressed economy, a low rate of inflation below target, and of course having to cut interest rates," reckons the Item Club's chief economic advisor Peter Spencer.

Tasked with keeping annual consumer-price inflation within one percentage point of 2.0%, the Bank of England saw the CPI rise by more 3.0% throughout 2010, but kept its key lending rate unchanged at an historic low of 0.5%.

The gold price in Sterling today touched a new 8-week low at £853 per ounce, some 25% higher from this time last year.

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 2011

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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