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Gold Rallies Back Above $900 on Favorable Macro Economic Outlook

Commodities / Gold & Silver Feb 06, 2008 - 01:17 PM GMT

By: Adrian_Ash

Commodities

THE PRICE of SPOT GOLD rose in London early on Wednesday, avoiding the harsh sell-off seen on Monday and Tuesday to bounce more than 1.2% from the overnight low of $886.50 as Asian stock markets sank for the third session running.


"The nightmare is continuing," said one Tokyo fund manager today as the Nikkei closed 4.7% lower. Australia 's All Ordinaries index dropped almost 3% for the day.

By lunchtime in Frankfurt , European stocks had crawled 0.3% higher, but a revised bid from BHP Billiton for Rio Tinto – the world's third largest mining company – pulled shares in the world's No.1 miner more than 4.6% lower.

If successful, the $147.4 billion bid would raise BHP Billiton's debt seven times over.

Crude oil meantime slipped another 0.6% to $87.85 per barrel on forecasts that US refineries have suffered their fourth week of falling demand, while on the currency markets the Euro slid to a 10-session low beneath $1.4600 and the Japanese Yen held at ¥106.25 per Dollar.

Sitting at the stronger end of its four-week trading range, the Japanese currency continues to signal "risk aversion" amongst global investors. The Yen has now gained 17% against the Dollar since the global banking crisis began last July.

The Gold Price in Japanese Yen, however, has risen by nearly 30%.

Over in China today, all investment markets – including the new Shanghai gold futures exchange – were closed for the start of the week-long Lunar New Year celebrations, and that gave a "soft leaning" to base metal prices as David Moore at Commonwealth Bank of Australia put it.

Copper traded at the London Metal Exchange dropped 0.8% in early trade; aluminum fell 0.5%.

"Short-term market participants [also] decided to liquidate their gold holdings before the Chinese New Year," said William Kwan of Phillip Futures in Singapore to Reuters this morning. "They prefer not to have any outright position over the long weekend."

Today in Tokyo , gold futures for delivery in Dec. '08 slipped almost 1% against the Yen to equal $900 per ounce. But longer term, the "positive upward trend in the Gold Price – with high volatility from time to time" – is set to continue according to Credit Suisse analyst David Davis, speaking at the Mining Indaba conference in Cape Town, South Africa, yesterday.

Davis predicts the price of Gold will reach $1,300 over the next six years, pushed higher by growing Gold Investment demand meeting a shrinking supply.

"Our studies indicate in the long-term global gold production will begin to decline as the diminishing number of new reserves fails to compensate for dying mines," Davis told the Indaba delegates.

"The decline will likely be accelerated should the gold mining industry continue to incur significant year-on-year inflation rates."

Gold-mining companies will be also forced to continue buying back the gold they sold forwards during the bear market of the late 1990s, he believes, with AngloGold Ashanti – the world's fourth-largest gold mining group – likely to begin "dehedging" this year.

And aiding new investment demand, "gold is entering friendly macroeconomic territory," as Citigroup analyst John Hill writes in an emailed report.

The US Fed's historic rate cuts of last month have now put the returns offered to Dollar holders far below the pace of consumer-price inflation – a classic set-up for Gold to attract anxious savers and investors looking to protect their wealth from stagflation.

What's more, "the Fed's aggressive cutting isn't over," believes Wee-Ming Ting, a manager of the $125.9 billion Pictet funds in Singapore . "[So] we still have room for short-term US bond yields to fall" – and the loss of purchasing power in government bonds will only drive more long-term money into gold. ( Find out why in this Special Gold Report ... )

In London this morning two-year US government bond yields dropped another two basis points to 1.89% following yesterday's news that the US services sector contracted in January at the fastest pace since the recession of 2001.

On "Super Tuesday" in the US presidential primaries, credit ratings agency Standard & Poor's also warned that any downgrade in the credit rating of bond-market insurers such as MBIA or Ambac – the so-called "monoline" insurers who underwrite $2.4 trillion in corporate and asset-backed debt – would force the world's major banks to take higher-risk bonds back onto their balance sheets.

"This could lead to a further prolonged period of generalized market disruption and a loss of confidence that would not be favorable for any financial institution," S&P said, helping push Wall Street to the worst one-day loss in almost 12 months.


Ahead of tomorrow's interest-rate decision from the Bank of England in London , meantime, UK consumer confidence just gave its worst reading since 2004 according to the Nationwide Building Society.

A private-sector employment report from KPMG also says demand for permanent staff rose last month at the slowest pace since Nov. 2004, supporting the consensus view – led by the slump in UK house price inflation – that the BoE will cut Sterling interest rates to 5.0% at midday Thursday.

The news drove the Pound lower on 15 of its 16 most-actively traded currency pairs, with the Sterling-Dollar rate – known as "cable" – falling 0.5% to break below $1.9600 for the first time since 24th Jan.

The Gold Price in British Pounds jumped 1.3% as the US open drew near, reaching a two-day high of £457.50 per ounce.

It has now risen by 38% since the US Federal Reserve began slashing Dollar interest rates at the end of August.

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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