Gold Rallies as Crude Oil Bounces
Commodities / Gold & Silver May 23, 2008 - 08:35 AMBy: Adrian_Ash
SPOT GOLD PRICES recovered an overnight dip of 0.7% early in London on Friday, nearing the US open above $926 per ounce as crude oil bounced from yesterday's sharp sell-off.
The US Dollar held flat against the Euro after a surprise fall in the PMI index, which tracks the European economic outlook.
London 's stock market slipped to a 2.5% loss for the week, pulled down by mining and energy stocks on what the newswires called "profit taking".
"Although we see further upside potential [in Gold ], a further correction is likely today," believes Walter De Wet at Standard Bank in Johannesburg, "as investors consolidate their positions ahead of the weekend."
Both New York and London – center of the world's international Gold Market – will be closed Monday for public holidays.
"Gold's mini-crisis [after reaching $1,032 in mid-March] can be explained by the easing of a major crisis – the credit squeeze," says the latest Fortis Metals Monthly from Virtual Metals in London .
"We believe gold's surge from September was different from the gains it had made earlier in 2007 and other years, in that it was a panicked response by investors to fears of a meltdown in the financial system.
"Now the situation appears to be under control, Gold has lost ground. [But] this does not mean it cannot head back towards $1,000 per oz unless the credit crisis again turns nasty. In fact it can – but for different reasons, and over a longer time-scale."
( What's the link between Gold & the Credit Crunch ? Read more here... )
Credit and counterparty fears came to the fore again in New York this week after David Einhorn, the hedge fund self-publicist running Greenlight Capital, repeated his accusation that Lehman Bros. – the fourth largest US investment bank – has actively misled investors over its true losses on credit derivatives.
"For the last several weeks, Lehman has been complaining about short-sellers," Einhorn added in his speech on Wednesday.
"Academic research and our experience indicate that when management teams do that, it is a sign they are attempting to distract investors from serious problems."
Lehman's stock lost almost 3% as news of Einhorn's analysis spread on Thursday. The Wall Street Journal then added pressure today on Moody's – the credit rating agency – by quoting a managing director who confirmed it switches analysts if "an analyst doesn't get the message" expected by the issuer of a particular debt investment.
Moody's stock has already lost 25% of its value so far this week after the Financial Times this week reported a computer glitch – dating to early 2007 – in the agency's "triple A" rating of $4 billion in complex debt derivatives.
New York senator Charles Schumer has since asked the US Securities & Exchange Commission to investigate.
But in the Gold Market today, however, "oil is the factor everyone is watching," reckons Narayan Gopalakrishnan, a trader at MKS Finance in Geneva speaking to Bloomberg.
"If oil drops today it could wipe about 10 dollars off the Gold Price ."
US crude oil futures bounced 1.2% in London trade this morning, rising to $132.40 per barrel after sliding 3.7% from the new peak above $135 hit on Wednesday.
"The oil market's term structure [has] tipped into contango," notes Brad Zigler at HardAssetsInvestor.com, "ending a stint of backwardation stretching back to July 2007."
In plain English, long-dated oil futures now cost more than nearer-term contracts, with oil for delivery in Dec. 2016 priced above $136 per barrel.
"Depending upon who you talk to," says Zigler, "this [rare event] either means the market's building in permanent expectations of higher-priced oil or it's a signal that the current price run-up has been overextended."
Meantime on the data front, Friday brings Existing Home Sales data for April from the US . Transaction volumes are expected to show a 1.6% fall after Thursday's record 1.7% drop in all house prices reported for the first quarter.
The number of US workers on jobless benefit last week held at a four-year high, said the Dept. of Labor, "underscoring the economy's woes" according to Reuters.
Looking at the broad shift in financial and economic power to the Middle East and Asia , "for Gold , faster appreciation of the Yuan, Rouble and Gulf currencies would be quite positive," believes Martin Murenbeeld, head economist at Dundee Wealth Management in Toronto , Canada .
"A stronger currency would benefit Gold demand in each region, and add to the rising demand from ongoing increases in local wealth."
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
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