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Gold Rallies on Record ETF Positions

Commodities / Gold & Silver Jan 17, 2008 - 10:25 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES for physical bullion ticked higher from their new one-week lows in early European trade on Thursday, moving 0.9% higher to $884 by midday in London .

Government bonds were sold lower as world stock markets bounced for the first time in three days. But 10-year German bund yields remained near 4.0% – the seven-week low hit after European Central Bank member Yves Mersch pointed to "downside risks" to the region's economic growth late on Wednesday.


The Euro today held near the two-week lows vs. the Dollar it hit on the news, helping the Gold Price in Euros recover €603.50 per ounce by lunchtime in Frankfurt, nearly 1.2% above yesterday's five-session low.

"Profit-taking happened in the past two days because the Gold Market is too long at the moment," said Anderson Cheung of Mitsui Bussan Precious Metals in Hong Kong to Bloomberg overnight.

"Wherever you looked, gold futures traded in New York or Tokyo , or the exchange-traded funds backed by gold, they all showed record positions."

Toppling nearly $40 per ounce from Monday's new record high, "the recent move [in gold] has been influenced significantly by the need to cover margin calls," reckons Darren Heathcote of Investec Australia in Sydney .

In today's broader commodity action, crude oil moved back above $91 per barrel after losing 3.2% on Wednesday's stronger-than-expected US stockpile data. Inventories of crude oil increased by 1.5% to 287.1 million barrels last week according to the Energy Information Administration (EIA), the first growth in nine weeks.

This morning the oil minister of Iran – the second-largest producer in Opec – said he sees no need for the oil cartel to increase daily production when it next meets on Feb 1st.

Soybean oil futures meantime rose 2.7% to new lifetime records at the Dalian Exchange in China, after the Chinese government imposed price restrictions on food suppliers in a bid to curb inflation – now running at an 11-year high of 6.9%.

"Firms will have to shut operations if they can't make profits," said Tian Renli, head of Jiusan Oils & Grains Industry in Harbin – and that will only serve to tighten supplies further.

Producers and dealers in grains, cooking oil, milk, meat and eggs must now seek official approval before raising their prices, while in Pakistan the ongoing civil unrest is now being worsened by a surge in wheat prices, reports Bloomberg.

"The flour crisis is bad, but in ordinary times it would not have been an impossible policy problem," reckons Adil Najam, professor of international relations at Boston University .

"Times are not ordinary in Pakistan , however, and it has become not just an additive to [President] Musharraf's problems but a metaphor for all that is wrong in his regime."

Over in Mumbai , India today, the Sensex stock index closed 0.8% lower – even as the broader Asian-Pacific markets gained 1% – thanks to a rising tide of "IPO fever" amongst local investors.

"There is a lack of interest [in existing stocks] because domestic investors are focusing on initial public offerings and taking liquidity away from the market," said one institutional broker to the Economic Times overnight.

Yesterday saw shares in Future Group – parent of India 's largest listed retailer – oversubscribed by more than 133 times ahead of next week's floatation. Reliance Power Ltd, the largest IPO in Indian history, was 14 times over-subscribed on only the second day of its offering.

One side-effect is that "Indians increasingly see limited upside for Gold Prices after last year's rise of more than 30%," the Economic Times goes on, "and they are ready to shift more of their savings from jewelry toward a stock market that notched up over 40% gains for three years running."

Even bullion dealers in India – the world's hungriest market for Buying Gold , most often in the form of heavy "investment jewelry" – are moving money into the stock market.

"I myself have sold gold and invested in the equity market," says Pawan Choksi, a gold dealer in Ahmedabad. "Who will take a chance with gold at these levels? Maybe there will be a correction."

But this flood of hot money into new Mumbai share offerings – matched by foreign investment cash seeking a piece of the sub-continent's booming stock market – also threatens a severe correction in the local equity market, and it has already forced fresh intervention in the currency markets from the Indian government.

"The Reserve Bank of India continues to intervene in the spot market to curb Rupee appreciation by purchasing US dollars," reports the Business Standard . The central bank has bought an average of up to $2 billion per day during the last week.

The RBI bought $98bn of the US currency last year, while the Indian Rupee rose by 12% vs. the Dollar regardless.

Gold, however, outpaced them both. It has very nearly doubled for Indian buyers since the start of 2003.

By Adrian Ash
BullionVault.com

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 www.BullionVault.com , 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.

Adrian Ash Archive

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