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Gold Rallies, European Equities Miss Out on the US Interest Rate Bounce

Commodities / Gold & Silver Jan 23, 2008 - 09:54 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES held steady on Wednesday morning in London , recording an AM Fix just off the overnight low of $887.80 per ounce while European stock markets continued to fall despite yesterday's emergency rate cut by the US Federal Reserve.

All 30 economists surveyed by Bloomberg News now expect the Bank of England to cut its key lending rate to 5.25% when it meets on Feb. 4th. "From a European perspective," agrees Amit Kara, an economist at UBS, "the Fed cut [also] adds to the risk of more and quicker rate cuts here.

But equity traders in Frankfurt , Paris and London today failed to follow Asian investors in buying the "Bernanke Bounce" – and while Hong Kong stocks may have closed 10% higher for the day, the Dax in Frankfurt stood nearly 3% lower by lunchtime.

Europe-wide, the FTSE Eurofirst index of the region's top 300 stocks has now lost almost one fifth of its value since Dec.

By contrast in the Gold Market , "we see no major downward correction on the horizon," say Gary Mead and Matt Turner, analysts at Virtual Metals in London writing for the latest Fortis Asian Metals Monthly .

"Gold has to an extent rejoined the mainstream of investment assets (albeit perhaps one for more sophisticated investors), not really for its traditional value as a hedge against inflation, but rather as a hedge against doubt and uncertainty vis-à-vis most other investment assets including equities, bonds and currencies.

"With US presidential candidates publicly outbidding each other on the amount they consider advisable to inject into the US economy to avoid economic recession...the more savvy US investors (and others elsewhere) are hunting for the best defensive/offensive asset play."

Outside Gold Investment , the best play according to Wednesday's early action remained government bonds, now priced so high that annual yields are below consumer-price inflation in the United States .

Bonds rose further still today, pushing the yield on two-year US Treasuries down to 1.94%.

Oil, base metal and traded food prices meantime slipped back, taking light crude traded for Feb. delivery down 1.5% to $87.80 per barrel on forecasts that US stockpiles grew by half-a-per-cent last week. Over on the currency markets, the Euro gave back half of yesterday's three-cent rally to dip beneath $1.4550.

That held the Gold Price in Euros at €607 per ounce after coming within €4 of a new all-time high on the Fed's emergency rate-cut yesterday.

Indeed, the Fed's historic cut to US interest rates boosted the price of gold for investors and anxious cash savers the world over, sending the Aussie Gold Price 3.2% higher and the price vs. Canadian Dollars up by 4.1%.

For British investors and savers looking to Buy Gold yesterday the price leapt 4.1% from a two-week low to hit £456, its highest level in five sessions. Gold priced in Japanese Yen rose 6.2% from its overnight low to reach ¥3,070 per gram.

That price was a 23-year high back in Nov., and it's barely 3% off the new quarter-century highs that Japanese investors saw on Monday last week.

Over on the other side of the trade, however, fresh problems continue to threaten gold mining supplies. Down 1% in 2007 according to the GFMS consultancy in London, global production looks unlikely to rise and meet the surge in gold investment demand already seen in 2008.

Goldcorp Inc., the world's third-largest gold miner, today said it will halt all new exploration spending in Argentina after the government in Buenos Aires slapped an extra 5% tariff on all gold exports last month.

The Argentine authorities also put a 10% levy on base metal production.

Meantime in South Africa – the world's No.1 gold producing nation until 2007 – the entire mining industry faces a severe shortfall in energy supplies.

Leading utility firm Eksom advised the Johannesburg government last month to hold off marketing South Africa for energy-intensive projects until 2013.

South African gold production has already halved in the last decade, but its decline is not isolated. " Canada 's gold production was down by 6.6% over the past five years, South Africa 6.8% and the United States 5.4%," the Chamber of Mines' chief economist, Roger Baxter, told the Classic Business show this week.

"All the majors have experienced falling output."

Management at GoldFields, the world's fourth largest gold company, reckon the energy-supply shortage at Eksom will leave them enough power to dig the world's deepest gold mines at Driefontein and South Deep. But they're concerned Eskom can only guarantee additional capacity beyond 2010, reports

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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