Gold Drops 1% from Sudden Spike as US Dollar Bounces from New Record Lows

By: Adrian_Ash

STRONG BUYING late in the late Asian session on Friday drove Gold Prices to a series of one-week highs as the US Dollar sank to new all-time lows vs. the Euro before suddenly putting in its fastest rally in a month.

Peaking just below $816 per ounce, the Gold Market slipped back 1% to bounce off $807.50 at the start of London trade. The European single currency sank more than 1.5¢ from its new lifetime high of $1.4967.

"Liquidity is quite thin in Asia today," said a dealer at Standard Bank to Reuters, but "there are bargain hunters at the lower end" countered another.

The 1.5% rally in Gold Prices broke Thursday's flat range around $803 per ounce, seen when the US markets were closed for Thanksgiving. It came despite Tokyo closing for today's Labor Thanksgiving celebration in Japan .

"The funds will be interested in joining the momentum on the buying side," said William Kwan, a dealer at Phillip Futures Pte Ltd in Singapore .

"There's active buying spurred by the Euro hitting new highs. Maybe we can see another movement upward."

Investment funds led by Blackrock Inc. certainly continue to hold large positions – if not in gold, then at least in the StreetTracks GLD fund. Owned by Merrill Lynch, Blackrock grew its Gold ETF holdings to almost 5% of GLD's outstanding shares in the third quarter according to Bloomberg analysis.

But Gold Investment by US or even European funds can't explain this morning's sharp move – a pattern of early buying that was also common during gold's 12-week run to near record highs at the start of this month.

Indeed, Credit Suisse – the largest institutional Gold ETF investor in the three months to June – cut its position in StreetTracks GLD to 1.4% of the outstanding shares.

"We have to have a certain amount of liquidity that is similar to cash," says Blackrock's manager, Graham Birch, "and that's what these ETFs do for us.

"If the Gold Price goes up, so much the better," he added. So is it possible that other, even larger investment funds based in Asia and the Middle East were also choosing gold ownership – both for liquidity and as a store of value – just ahead of the London opening today?

"We need a multilateral policy for dealing with currency exchange rates," said Peter Bofinger, one of the German government's 'Five Wise Men' in an interview with Der Spiegel this week.

"In the current, weak-Dollar situation, China, South Korea, Japan, Russia and other countries that have huge Dollar reserves would have to be brought on board. A treaty should be signed with their central banks so that they don't dump massive amounts of Dollars onto the market.

"A similar treaty already governs the Gold Market in Europe ," Bofinger added, referring to the Central Bank Gold Agreement that caps sales of the world's previous reserve currency, gold bullion, to 500 tonnes per year.

Back in today's early action, and European stock markets were also volatile, adding 1.0% to London 's FTSE100 by lunchtime but struggling to see any gains on the German Dax in Frankfurt . The MSCI index of Asia-Pacific stocks ended the day little changed, completing its fourth losing week on the run.

On the other side of the trade, meantime, government bond prices continued to push higher worldwide.

Despite a strong increase in Germany 's import-price inflation – reported today at 2.3% in Oct. compared with Sept.'s 1.3% rate – investors have now pushed two-year Bund yields down to a 13-month low.

Japanese 10-year yields have sunk to a two-year low, while US Treasury bonds have now risen so fast, the 10-year yield pays less than 4% and the two-year will pay less than 3% per annum to new buyers today.

"The Yen bond market is one of the safer places to put your money," reckons Yuuki Sakurai at the Fukoku Mutual Life Insurance Co. in Tokyo . He helps manages some $41.5 billion-worth of assets.

"It's not about price or yield anymore," Yuuki-san adds.

But with crude oil and global food prices continuing to threaten further steep increases – even as the futures market puts 90% of its money on lower interest rates when the Federal Reserve meets on Dec. 11th – both the price and yield of fixed-income assets may soon come to seem awfully important once again.

Two-year US Treasuries have now enjoyed their longest price-rally in five years. But as a result, they're paying less than even the official rate of Consumer Price Inflation in the United States .

The CPI rose to 3.5% last month. Several respected economists put the true figure – with exclusions and mathematical trickery removed – at two or even three times that rate.

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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