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Gold Bounces as Protectionism and Money Printing Spreads

Commodities / Gold & Silver 2009 Feb 02, 2009 - 07:02 AM GMT

By: Adrian_Ash

Commodities Best Financial Markets Analysis ArticleTHE WHOLESALE PRICE of gold bullion sank 2.3% in early London trade on Monday, bouncing off $905 an ounce as world stock markets also tumbled.

German and French equities dropped more than 2% by lunchtime after losing one-tenth of their value in January.


With much of the City's senior management kept at home by the worst snow-fall in 18 years – and with wild-cat strikes hitting UK energy facilities over the hiring of foreign workers – London's FTSE100 index slid 1.6%, dragged lower by banking shares.

"Reasonable estimates of the shortfall in private [US] demand are on the order of three times the $800 billion stimulus package," writes 2008 Nobel prize-winner Paul Krugman in his blog for the New York Times .

"There is a short-run case for [economic] protectionism – and that case will increase in force if we don't have an effective economic recovery program."

President Obama denied at the weekend that establishing a "Bad Bank" to take toxic assets off private financial balance-sheets could cost US tax-payers $4 trillion.

Today the Chinese premier Wen Jiabao told the Financial Times that "We may take further new, timely and decisive measures before an economic retreat" after new data showed 20 million rural migrants losing their jobs and returning home from China's once-booming cities.

Beijing is already running a stimulus package worth $586 billion, announced in November.

"Such rescue efforts so far have failed to stem financial sector problems," notes Christine Li, an analyst at Moody's – the credit ratings agency – here in London.

"Investors have continued to shift their money to safe havens such as government bonds and Gold ."

Nick Moore, chief commodities strategist at RBS – the No.1 UK bank, now 70% owned by the state – agrees.

"We view markets as increasingly concerned about the implications of aggressive monetary pump-priming that is going on in the US and elsewhere.

"In these treacherous markets, making money is not necessarily the prime objective. Stemming losses and capital preservation are also at play and gold should satisfy these objectives."

Back in Monday's action, US crude oil futures fell to $40.50 per barrel while government bonds rose across the board and what one trader last week called the " New Risk Dynamic " in foreign exchange markets continued – albeit in reverse.

January 2009 saw the sharpest-ever divergence between the movement in Gold and in Europe's main currency vs. the Dollar.

Today the Euro rose against the US Dollar and Japanese Yen, even as the Gold Price fell. The single currency also bounced two-pence against the British Pound after losing 7% of its Sterling value in five sessions.

The Gold Price in Euros fell sharply from new all-time highs above €628 an ounce. But at the Asian opening, gold recorded new all-time highs against the Australian and Canadian Dollars, as well as the Swiss Franc.

"According to our traders, today's [gold] selling emanated from Chinese traders," says John Reade, analyst at Swiss giant UBS, in a note to clients.

Returning from China's long Lunar New Year celebrations, "We suspect they saw Euro-Dollar lower, gold much higher and sold short-term gold positions they owned," reckons Reade.

"The sharp move lower triggered stops on the electronic futures market. [However] we expect safe haven buying to support gold and hold our one-month forecast at $900."

" Gold broke the $916 resistance on Friday evening and surged higher," adds today's technical note from Mitsui here in London, "getting right to our target of $930 where it paused and then closed a few dollars lower.

Looking ahead for Gold in 2009 , says Mitsui, "$930 was the October high and a break of this level would project us back to four-figure gold."

The precious metals dealer now pegs support at $900 an ounce, adding that " ETF investors are still convinced of the longevity of this market."

Last week saw the gold held at various London bank facilities on behalf of New York's SPDR gold trust swell by 11 tonnes.

Daily trading volume in the world's largest Gold ETF reached a 3-month peak, as did the Dollar-gold price – on what wholesale dealers and brokers confirmed as strong demand from investment institutions.

Twenty-two out of 31 traders and analysts interviewed worldwide by Bloomberg News at the end of last week forecast a higher Gold Price by this Friday.

Eight advised selling, the newswire says. One was neutral.

Over on the US Gold Futures and options market, latest figures show hedge funds and other "Large Speculators" growing the net long position to a five-month high in the week to last Tuesday, up almost three times over from the 41-month low of mid-November.

That coincided with gold falling to $680 an ounce, then a one-year low. The Gold Price has since risen by more than one-third.

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 2009

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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