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Gold Bounces as Equities Bull Market Sinks on Unwinding of the Carry Trade

Commodities / Gold & Silver Jan 16, 2008 - 09:42 AM GMT

By: Adrian_Ash


SPOT GOLD PRICES continued to plunge early in London on Wednesday, dropping 3.8% from Tuesday's high to bounce off $880 per ounce and recover $886 as the US open drew near.

"The latest data shows that net Comex gold [futures] positions and holdings in the physically-backed ETFs have reached to record levels," according to Suki Cooper at Barclays Capital.

"Given the speculative length, there is potential for short-term Gold Price corrections.

"However, we would view these in the context of what remains a strong medium-term uptrend, buoyed by positive external drivers as well as constrained mine supply."

Gold futures traded at Tokyo's Tocom exchange led the early plunge today, sinking 3.7% to equal $893 per ounce as the Japanese Yen rose to a 30-month high vs. the Dollar.

The US Dollar also fell to an all-time record low vs. the "safe haven" Swiss Franc, confirming an outbreak of risk aversion amongst "carry trade" investors who'd built up highly leveraged positions by borrowing low-yielding currencies to fund better-paying investments.

Japan 's Nikkei stock index today sank to a two-year low, while Hong Kong shares closed out their worst day since Sept. 2001, losing 5.4% for the session. In London , the blue-chip FTSE100 dropped 1.6% to falling below the 6,000 mark.

Northern Rock – the over-geared mortgage bank that suffered Britain 's first banking panic in more than a century last Sept. – lost yet another 20% as shareholders looked ahead to nationalization by the British government following yesterday's failed attempts to block the move.

Crude oil meantime lost more than a dollar to $90.75 per barrel after the International Energy Agency trimmed its forecast for global oil demand growth from 2.4% to 2.3% in 2008. And "if you look at the broad direction in prices between gold and crude oil since 2001," said Philip Klapwijk, head of the GFMS gold consultancy, to Bloomberg earlier, "it's been pretty close.

"[But] crude oil prices are still high," he noted – and "commodities remain a good investment," believes Uwe Parpart, chief economist and strategist for Asia at Cantor Fitzgerald – and managing director of fixed-income and currency research – speaking to CNBC's Amanda Drury.

In equities, "this bull is dead," says Parpart. "The bear market started in the third quarter if not the beginning of the fourth quarter of last year.

"What we've seen is a major crisis in financial intermediation, and that's similar to a heart attack. It's similar to a situation where the blood circulation in the human body comes to a stop – and you're not going to come back from that in six months.

"People have been going into commodities and going into gold, and that's a good hedge against inflation. With global liquidity being pumped up – the Fed is almost certain to cut by 50 basis points on January 30th – I think the Gold Price will continue to go up."

On a technical basis, the Gold Market has now clearly broken through the near-vertical uptrend starting in mid-Dec. After watching it burst through the three-decade top of $850 per ounce, analysts looking for short-term support can only point to the 20-day moving average at $852 per ounce.

Below that sits the 100-day moving average at $782 per ounce.

"There is little to no physical demand" from jewelry and industrial buyers says today's note from Mitsui, the international metals dealer, "and we expect this to remain until the Gold Market corrects back towards $800 per ounce, the level gold consolidated towards at the end of last year.

"The long-term outlook for precious metals is still bullish [however] on the back of the weak US economy and supply/demand fundamentals."

In Hong Kong this morning, HKEx – the Hong Kong Exchanges and Clearing company – announced it will begin trading in gold-related futures and options, as well as exchange-traded gold trust funds, in a bid to "help strengthen Hong Kong 's position as an international financial centre."

"Our market systems can support the trading of these products," said chief executive, Paul Chow. HKEx is "taking a long-term view," he added, proven by the fact that "initiatives like these tend to have lengthy timeframes."

Meantime in the Western investment markets, "there are a lot of people out there looking to get into the Gold Market at the moment, and as a result, we have seen an increase in demand for gold coins," says Alan Demby, head of South Africa 's Gold Coin Exchange.

"I think that people are looking for a safe haven, so that money is going into gold," he added.

But with gold coins still one of the most expensive investments you can make outside the hedge fund industry, price-conscious buyers are moving into cheaper alternatives at a much faster pace. The gold bullion held in trust by the leading US exchange-traded fund (ETF) has grown by 45% over the last 12 months.

Private investors choosing instead to own gold bullion outright, with no risk of credit default – and at one-third the annual fees charged by the ETFs – have more than doubled their secure holdings at BullionVault since Jan. 2007.

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 2008

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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