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Gold Follows Euro Lower

Commodities / Gold & Silver May 07, 2008 - 08:55 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD fell hard early Wednesday in London, losing 1.5% from Tuesday's peak to reach a two-day low as shock data from Germany drove the Euro lower against the US Dollar on the currency markets.

Crude oil meantime pushed above $122 per barrel on news of terrorist attacks in Nigeria , the world's seventh-largest producer.


European stock markets rose 0.7% on average. Tokyo 's Nikkei index reached a four-month closing high.

"Yesterday's comments by Thomas Hoenig, president of the Kansas Federal Reserve, that the Fed might need to raise interest rates to curb inflationary pressures, should provide further support to the greenback," notes Walter de Wet for Standard Bank.

"In the event that the Fed raises rates this year (which we believe unlikely), it would be bearish not only for Gold and silver, but also for PGM [the platinum group metals], because consumer spending would come under more pressure."

Now targeting short-term interest rates of 2% – barely half the rate of US inflation – the Federal Reserve will today ask Congress to let it pay interest on cash reserves held by commercial banks.

"If they earned interest from the Fed," says Greg Ip – who first floated this story in the Wall Street Journal last month – "banks would have no incentive to lend out excess reserves for less."

That would "put a floor under the Fed funds rate" explains Ip, while enabling the Fed to lend freely "and deal with the credit crunch."

Such "quantitative easing" – in which the central bank floods the financial system with unlimited loans to try and kick-start the economy – was used by the Bank of Japan between 2001-2006.

It tried unsuccessfully to defeat a debt-led depression starting more than a decade before.

Under the Fed's proposal, however, the US would avoid 0% interest rates no matter how much it lent.

The US central bank has already lent out half of the $800 billion in US Treasury bonds it held in July last year, accepting lower-grade bonds as collateral from banks and securities dealers.

"[The Fed's $29bn support for Bear Stearns in March] was an inflection point", claimed US Treasury secretary Hank Paulson in an interview overnight, adding that "the worst is likely to be behind us" in the global credit crisis.

For gold investors, "peaks and troughs in financial market stability and risk aversion continue to directly correspond to peaks and troughs in Gold ," notes Mitsui, the precious metals dealer, today.

Falling 1.5% from Tuesday's five-session high of $883 per ounce, the Gold Market today tracked the European single currency lower after a surprise 5% drop in German factory orders was reported for March.

Analysts in Frankfurt had expected 5.7% growth.

European retail sales fell by 1.6% year-on-year in March, the Eurostat agency also said today, encouraging speculation that the European Central Bank will be forced to cut its key lending rate in the face of rising inflation.

Today's one-cent drop in the European currency held the Gold Price in Euros above €563 per ounce by lunchtime in London . Poor data from the United Kingdom also forced a sharp drop in the Pound Sterling.

Industrial production shrank by 0.5% in March according to the Office for National Statistics, despite a cut in both the Bank of England's lending rate and a falling cost of UK exports for foreign buyers. The news sent the Pound down to a new 11-week low beneath $1.9550. It helped support the Gold Price in Sterling above last week's high of £444 per ounce.

"As long as we continue to feel inflation creeping into our day-to-day lives, Gold will work higher," reckons George Nickas, a metals broker in New York for F.C.Stone.

Gold's 15% drop from March's all-time high above $1,030 per ounce is merely "a correction" he tells Bloomberg, pointing to the metal's own fundamental strength, as opposed to the Gold Market's apparent reliance on crude oil prices.

Today in India , the World Gold Council forecast a 25% increase in gold sales for this year's Akshaya Thritiya festival. This auspicious date in the Hindu calendar, which falls on 8th May in 2008, marked 55 tonnes of consumer Gold Buying last year – some 5% of India 's total gold consumption for 2007.

"This year Akshaya Thritiya is likely to become much bigger than in past years, as Gold Prices are very attractive," believes Ashok Minawala, head of the All-India Gems & Jewelry Trade Federation.

"Akshaya Thritiya is considered very lucky because Akshaya in Sanskrit means ‘that which never diminishes'," says Jayant Manglik, head of commodities at Religare Enterprises, also speaking to the Business Standard in Mumbai this morning.

"It is believed that whatever is done on this day shall continue to increase for the rest of the year. In general, it reflects positively on the person's future. Therefore, consumers want to Buy Gold on this occasion."

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.

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