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Commodities / Gold & Silver Dec 10, 2007 - 08:51 AM GMT

By: Adrian_Ash


Fed Set to Cut US Interest Rates Even as Global Inflation Surges - GOLD PRICES rose throughout the Asian session on Monday, starting the week in London just above $800 per ounce – a gain of 0.7% from Friday's US close – for physical metal delivered immediately.

Crude oil prices slipped 0.8%, meantime, while the US Dollar hit a four-week high vs. the Japanese Yen.

It slipped to three-session lows, however, against both the Euro and Pound Sterling.

"The Gold Market is not going to see any big move before the Fed's meeting" on Tuesday, reckons Ronald Leung, head of Lee Cheong Gold Dealers in Hong Kong.

"Investors, mostly funds, have already left the market before the year-end to prevent big price gyrations from affecting their bonuses."

"It would be a surprise to see Gold Prices break out of last week's range [$786-$806] before tomorrow's announcement" on US interest rates, agrees Brandon Lloyd in today's note from Mitsui in Sydney.

But while the impact of Federal Reserve decisions cannot be ignored, it can also prove surprising.

Yes, the Fed's 0.5% cut to its "discount rate" in the middle of August kick-started a near-30% gain in spot Gold Prices by early Nov. But the 0.5% cut in the Fed's main target rate on Sept.18th was followed by a two-week pause in this fall's surge.

The 0.25% cut on Oct. 31st was preceded by a 10% gain in gold – and followed by only a 6.5% rise.

What's more, "physical demand for spot gold may rise approaching the year-end with the long-term uptrend in the bullion market remaining intact," says a report from the Jingyi Futures Co. in China today.

If the Gold Price remains near $800 per ounce, however, that demand for physical Gold Bullion will have to come from investors rather than jewelry consumers.

The Bombay Bullion Association said at the weekend that gold imports into India fell by four-fifths last month from Nov. '06, dropping to 12 tonnes as the surging price – and near-record price volatility – dented the traditionally strong seasonal demand.

"The past two months have been disastrous for jewelers," said Suresh Hundia, president of the BBA in an interview Sunday. He believes Indian jewelry demand will only revive if the international Gold Price slips to $773 per ounce.

India's jewelry market – the world's hungriest – "is a price sensitive market and people are willing to wait for prices to dip before they make purchases," says Si Kannan, an analyst at Kotak in Mumbai.

"Also a surge in scrap sales dented demand."

Investors wanting to Buy Gold Today got fresh impetus this morning after UBS, the world's largest wealth management group, issued a profits warning.

UBS admitted that a full-year loss is "now possible" after writing down a further $10 billion lost to the global credit crunch caused by failing US mortgage investments.

The move contrasts with this morning's announcement from Lloyds TSB, the only AAA-rate bank in London. It wrote down just $226 million of its asset-backed and off-balance sheet investments – very nearly the same hit caused by this summer's floods in central and south-west England.

Meantime in Tokyo, the Nikkei stock index clipped a three-day rally to close 0.2% lower. Taipei, Seoul and Hong Kong all finished the day more than 1.1% lower.

European stocks ticked 0.3% higher by midday in London as banking stocks rose regardless of UBS's warning. Mining stocks gained on a rise in copper and base metal prices.

"If the US needs to cut its interest rates, that means the near-term economic outlook is not so good," says Tetsu Emori of Astmax Futures, a Tokyo fund manager.

"[Tomorrow's] rate cut may avert a credit crisis in the first half of next year but probably would not help the economy in the second half."

US interest-rate futures put the odds of a 25-basis point cut from the Fed at 74%. Data showing the number of US homes now under contract for sale – due for release at 15:00 GMT today – will show a 1% fall according to the average guess of 23 economists surveyed by Bloomberg.

"Oil consumption is unlikely to grow," Emori told the newswire today, as crude oil for Jan. delivery slipped 0.8% in Asian trade. "There are no bullish factors – US stockpiles are adequate, Opec's spare production capacity is more than 3 million barrels a day, and global oil demand growth for next year is probably less than 2%."

But while oil prices may moderate in the near-future, world food prices continue to push higher, with soybeans today hitting a 24-year high and wheat adding to this year's 87% gains-to-date after India's State Trading Corp. invited bids to import 350,000 tons of the grain to help grow government stockpiles.

In China, the National Grain & Oil Trade Center said Friday it will release 500,000 of its state-funded stockpile of wheat for sale in Guangdong, Fujian, Sichuan, Guangxi and Shanghai from tomorrow.

The bull market in basic food costs helped drive input-price inflation for UK manufacturing to a 16-month high of 10.3% year-on-year in November, the official statistics agency said today.

That pushed output price inflation at the factory gate up to 4.5% from a year earlier, the highest rate since 1991.

Average input prices have now risen by 45% since Nov. 2002. Last month's sharp increase was driven by a near 50% rise in crude oil prices from Nov. '06, plus a rise of one-fifth in the cost of domestically-sourced food.

Last week, the Bank of England cut its key interest rate for the first time in two years, claiming that weakening consumer demand will somehow suppress growth in price inflation.

"Currently, the two most important central banks in the world are facing a big dilemma," noted the Berliner Zeitung newspaper at the weekend.

"Given the current situation...the European Central Bank should really have increased interest rates long ago, because inflation in the Eurozone is higher than it has been for many years.

"There are also certain risks of inflation in the US. Nevertheless, the Fed has actually lowered interest rates several times recently."

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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 , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

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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