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US Dollar Rallies and Gold Fall Ahead of US Inflation Data

Commodities / Gold & Silver Dec 14, 2007 - 08:29 AM GMT

By: Adrian_Ash


THE SPOT GOLD MARKET slipped back early Friday from a 1% bounce overnight, dropping to a new six-session low beneath $792 per ounce as the US Dollar rallied towards the Wall Street open.

Asian stock markets ended the week lower, dropping more than 3% from last Friday in Tokyo . Europe 's major bourses reversed early gains to trade flat by lunchtime in London , while US crude oil ticked higher to $92.34 per barrel.

The International Energy Agency today forecast daily world oil demand will rise 2.5% in 2008.

"We are trading in low liquidity," said William Kwan, a gold dealer with Phillip Futures in Singapore , this morning. "The market is easily pushed left to right."

"Bullishness is ample and the Gold Charts are far from hinting at a major crash," says Pradeep Unni, analyst at Vision Commodities in Dubai . "But still gold is moving quite slow, taking enough time to consolidate around [a new] range and then proceeding ahead.

On the currency markets this morning, the US Dollar hit a new six-week against the Japanese Yen above ¥113.00. That move capped selling in the Tocom Gold Market , and gold futures for delivery in Oct. '08 ended the day only 0.3% lower, equal to $808.60 per ounce.

The British Pound dropped more than two cents to the Dollar, meantime, while the Euro sank to a six-week low beneath $1.4500, limiting the drop in gold for European investors early Friday.

The Gold Price in Euros held above €545.50 per ounce. For British investors wanting to Buy Gold Today , it held above £390.50 – just shy of where it closed last week.

"The market is focused on interest rates," reckons Charles Nedoss, senior metals analyst at Peak Trading in Chicago . Pointing to Thursday's US producer price inflation data, "what came out was inflationary," he told Dow Jones Newswires overnight.

US consumer price data for last month was due out Friday at 08:30 EST.

"Normally, this would be very bullish for gold," agrees Leonard Kaplan of Prospector Asset Management, "but the PPI came in extremely hot – over 7% year on year. It is quite obvious to the world that the Fed may have made a bad mistake dropping rates and the chances for lower interest rates are diminishing quickly.

"Higher rates create a higher Dollar, which creates lower gold."

But "we're trying to deal with two polar opposite problems here," as Robert Kowit, international bond manager at Federated Investors, explained to Reuters' Investment Outlook Summit in New York yesterday. "I would say stagflation [slower growth but rising inflation] is an increasing concern for most investors."

"When we talk about what a Dollar crisis looks like, at least in my experience, it's been accompanied by a stagflationary environment." ( For a free report on What's Really Driving the Gold Market today, click here now... )

"The Dollar is at risk of a loss of caste," agrees James Grant, editor of the eponymous Interest-Rate Observer newsletter.

"The Dollar is losing its reserve currency status and deservedly so. Don't you know which country it was that exported the subprime mortgage crisis?"

Pointing to Tokyo 's refusal to acknowledge its post-bubble losses of the early 1990s – which led the Japanese economy to "stew in the juices of failure for a full decade" – the US Fed should now "let markets find a level and be a little less quick to be the federal first responder to the scene of financial accidents."

Holding cash and value stocks, Jean-Marie Eveillard – "one of the most successful long-term" investors according to MorningStar's lifetime award – now holds a 7-8% position in gold in his portfolios for the $45-billion First Eagle Funds.

Eveillard told Reuters on Thursday that he's buying gold "as insurance against one to three years of difficult economic and financial circumstances" to come.

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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