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U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Gold to Take Cue From US Fed Interest Rate Decision

Commodities / Gold & Silver Dec 10, 2007 - 09:01 AM GMT

By: Gold_Investments

Commodities Gold
Gold was down $6.90 to $794.40 per ounce in New York on Friday and silver was down 10 cents to $14.34 per ounce. Gold has rallied in Asian and early European trading and is trading at $801.50/802.00 per ounce at 1200 GMT. Gold has traded sideways in pounds sterling and euro to £392 GBP (down from £394 at 1200 GMT Friday) and €545 EUR (down from €547 at 1200 GMT Friday).

Last week gold was up 1.5% and silver was up 2.6%.


The dollar and oil are largely flat since Friday. Gold is likely to take its cue from the Federal Reserve's interest rate decision with further interest rate cuts likely to weaken the dollar and bolster gold. The deterioration in the U.S. housing market is now spreading to the wider economy and that has led to some speculation of a drastic 50 basis point cut which would be very bullish for gold. The Wall Street Journal reports today that U.S.' corporate profits are being hammered by the slowing economy and credit-market turmoil, intensifying concerns that the nation may be headed for recession.

"The recession in reported earnings has already begun," says David Rosenberg, chief U.S. economist at Merrill Lynch & Co. "The underlying cause is a combination of painfully high energy prices and the general lack of pricing power in many businesses, which is starting to crimp margins." Most economists expect things to get worse before they get better. "We're facing a tsunami of earnings downgrades next year," says Rosenberg.

Asia-Pacific stocks and European financials fell Monday following the news of the $10 billion subprime writedown by Swiss banking giant UBS. Further massive writedowns of this nature are expected and this is leading and will lead to further safe haven demand for gold. Gold is unique among asset classes as it is the only asset class not dependent on the performance of auditors, management, corporations, politicians and governments. When you buy gold in its physical form there is no third party liability or credit risk. Gold has a self-intrinsic value and is not contingent on someone else's mere promise to pay. Thus, gold in its physical form is still the ultimate form of financial insurance. This is why the major central banks in the world still retain gold bullion as an essential component of their reserves.

In contrast to Goldman Sachs much publicised unusual call to short gold in 2008 (in the light of the incredibly strong fundamentals of the gold market), JP Morgan have said that they are bullish on commodities and particularly precious metals in 2008. They believe that precious metals will be the strongest commodities and that gold and platinum will be the best performing precious metals. They expect their respective prices to average $815 an ounce and $1,475 an ounce for 2008, with risks strongly skewed to the upside and they predict will surpass its 1980 high above $850 per ounce and reach $900 per ounce.

The U.S. bank said that precious metals are unlikely to de-link from the dollar next year and it expected a large portion of the movement and price appreciation in metals prices is likely to come from the currency markets.

"Precious metals have the most scope to rally given their leverage to currency markets and supply constraints. Mining supply growth will likely be flat in gold for the next four years, while platinum and palladium will likely remain in deficit next year," JPMorgan told clients in a note.

Silver
Silver is trading at $14.40/42 at 1200 GMT.

PGMs
Platinum was trading at $1460/1464 (1200 GMT).
Spot palladium was trading at $344/350 an ounce (1200 GMT).

Oil

Oil stayed at just above $88 a barrel in Asian trade Monday. Prices declined Friday after a November U.S. jobs report turned out to be less robust than expected. Crude oil futures have retreated more than 10 percent from their all-time high near $100 in November, in part on the belief that slower growth in the world's largest economy will cut into demand growth for oil but also due to the lessening of risk of a U.S. confrontation with Iran.

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