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ECB Interest Rate Hike Sends US Dollar High and Gold Lower

Commodities / Gold & Silver Jul 03, 2008 - 08:24 AM GMT

By: Adrian_Ash

Commodities

SPOT GOLD PRICES recovered an overnight dip early in London on Thursday, re-touching this week's two-month highs as crude oil broke new all-time records near $146 per barrel and the Dollar fell after the much-expected Eurozone rate-hike.

As flagged by European Central Bank members since April, the ECB in Frankfurt today raised its overnight lending rate to 4.25%, widening the Euro's advantage over US Dollars to 225 basis points.


The Euro briefly touched a new 10-week high above $1.5900 on the news, while over on the commodity markets, soybeans and copper both raced towards new all-time highs in US Dollar terms.

"Of concern," says today's Gold Market note from Mitsui in London , "the Comex announced it is increasing the margin requirement on gold futures by 15%.

"Traditionally this fosters some position liquidation as a lot of punters are fully leveraged already. An increased margin requirement has to be funded somehow.

"Also, with the US heading into the 4th of July long weekend today, we expect a lot of volatility."

Looking at Gold 's near-10% rally over the last three weeks, "the SPDR gold ETF in New York added 465,000 troy ounces yesterday," Mitsui explains, "an increase of nearly a million ounces since the start of July.

"Newcrest Mining has also announced the closure of its hedge book for an average price of $868."

Meantime on the financial markets, in contrast, European stock markets suffered their 17th losing session in the last 24 today, taking the loss on Germany 's Dax index to more than 11% since the start of June.

"With equity markets groaning under the pressure of poor economic data and the US Dollar out of favor [on] the ECB decision, monies are flowing into oil," said Rob Laughlin, a broker at MF Global in London , to Bloomberg earlier.

"Who would want to be short oil at this moment in time?"

Thursday morning saw crude oil race towards $146 per barrel, taking its rise against the US Dollar above 50% for 2008 so far.

After the Dow Jones closed last night more than 20% lower from its November peak –technically taking it into a bear market, as Reuters finally notes today – "I think we're seeing a capitulation of sorts," believes Marc Pado, US strategist and technician at Cantor Fitzgerald in San Francisco .

"The stock market is really on its knees. Crude has a knife in our back and it keeps twisting. [Wall Street] needs a positive catalyst. It could be today's jobs number."

Already today both the German and UK purchasing managers indexes came in below expectations, pointing to a slowdown in European services.

The Stockholm General stock index dropped 2% after the Swedish Rijksbank raised its lending rate by 0.25% to 4.25% – a new 10-year high to match Sweden 's 10-year record inflation rate.

Ending a five-day tour of Europe in London today, US Treasury secretary Hank Paulson warned that "oil prices are a strong head wind and at this level, they have got a high risk that they are going to prolong the slowdown."

US interest rates have now stood below the headline US inflation rate for six months running. Gold Prices have risen nearly 13% since the start of January.

The 36-month run of negative real returns to cash paid on US Dollars between 2002 and 2005 saw the price of Gold rise by more than one-half.

" Gold is a very fickle market which is partly why investors can't quite embrace it yet," reckons Ben Davies, co-manager of the Hinde Gold Fund here in London .

"Gold feels too volatile...but when [investors] realize that losing 40% to 80% of their current asset portfolio isn't great either, they might think otherwise."

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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