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Gold Slips from $1,000 as Citigroup Nationalisation Rumors Stem Stock-Market Slump

Commodities / Gold & Silver 2009 Feb 23, 2009 - 08:00 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE of physical gold slipped to $980 an ounce early Monday, dropping 2.5% from Friday's peak above $1,000 as world stock markets crept higher for the first time in 10 sessions.


Versus the Euro and British Pound, the Gold Price retreated more than 4.2% as the Dollar also eased back on the currency markets.

Today's Wall Street Journal , New York Times and Financial Times all cite "sources" saying the US government is about to take a stake worth up to 40% of Citigroup, the Western world's very largest financial group.

Building a stake in Citi and the other major US banks would "at least remove some of the uncertainty around the banking sector," one strategist said to Reuters earlier.

"Gold is one of the bright lights in a rather dismal environment," noted James Wilson, a stock-broking analyst at DJ Carmichael in Perth, Australia, to the Business Spectator website this weekend.

Australian Gold Mining firms continue to raise new funds for exploration and expansion, even while metals miners worldwide face a drop of $50 billion or more in available funds this year.

"That same amount might be cut from planned budgets in 2010," according to the Virtual Metals consultancy here in London.

Newcrest Mining saw its mid-Feb. stock placement raise half-as-much-again as it wanted at A$750 million. Today St Barbara Mines sourced a further A$75 million (US$48m) from new investors.

Over in Hong Kong, meantime, new Gold Mining share Real Gold gave back an early 10% gains on its stock-market debut.

The initial price offering raised US$132 million. Monday's close priced Real Gold Mining at 10 times projected 2009 earnings.

Both the Zhaojin and Zijin mining groups – the largest gold miners in China, now the world's No.1 gold-producing nation – trade nearer 20 times 2009 forecast earnings.

"Gold is consolidating because of stronger equity markets," reckons Commerzbank analyst Carsten Fritsch, speaking to Bloomberg earlier. "But another race above $1,000 and a test of the record high from last March is still very likely if equities turn lower again."

Asian shares rose sharply outside Japan on Monday, while the Nikkei lost another 0.5% and Tokyo Gold Futures crept higher to ¥2965 per gram, a fresh 5-month high.

US crude oil futures rise back above $40 per barrel – a level first broken in May 2004 but still 72% below the record high of last July.

Government bond prices fell everywhere, particularly long-dated US Treasury debt.

Today US President Obama will convene the first meeting of his Fiscal Responsibility Summit at the White House, aimed at tackling the United States' surging budget deficit – already set to swell by $1.3 trillion this year alone.

"The steady drumbeat of weak economic and financial market data have made business economists decidedly more pessimistic," says Chris Varvares, president of the US National Association of Business Economists, presenting a survey of 47 professional forecasters today.

On average, the group sees recovery postponed until the second half of 2009. But "There are still no perceptible signs that the G10 economy has hit the bottom yet," as Steven Barrow notes for Standard Bank in London this morning.

"Add this dire economic outlook to the prospect of government bond purchases by the likes of the Fed and Bank of England, and we think that bond yields will fall."

Standard Bank's forex team now see 10-year US Treasury yields falling below 2%, with Eurozone yields near that level and UK gilts yielding between 2.50% and 2.75%.

"The prospect of quantitative easing is not a particularly positive one for the Pound," Barrow adds, "but the Fed is easing in this way already, and other currencies, like the Euro and Swiss Franc, have their share of troubles as well."

Head of the European Central Bank (ECB), Jean-Claude Trichet, today hinted that the ECB may also move to increasing the supply of money – known as Quantitative Easing – in response to falling credit supply.

"Net credit flows in the Euro area remained positive during most of the financial turbulence," he told the Committee of European Securities Regulators in Paris today.

"But in recent weeks we have seen the first signs of falling credit flows."

The Swiss Franc also continued to slip on the forex markets today, after Friday's decision by banking giant UBS to pay $780 million in fines and reveal details of 52,000 accounts belonging to US citizens – worth $14.8 billion – apparently used to avoid US income tax.

Meantime in the major Gold Mining sector, Barrick Gold – the world's No.1 gold miner – said Friday it intends to raise production in 2009, an ambition matched by world Nos. 2 and 3, Newmont and Goldcorp.

Goldcorp aims to raise annual output by 50% between now and 2013. Newmont's huge Boddington project will come on-stream later this year, becoming Australia's largest gold mine when it hits full capacity at one million ounces per year.

Looking further ahead for Gold Supply in 2009 , "Does the IMF still need to sell 403 tonnes of gold?" asks the Virtual Metals consultancy in its latest Metals Monthly – an issue it examines in depth in the current Yellow Book of gold-market analysis and data.

"The financial and economic crisis has seen the IMF come back into fashion, with its loans rising from a low of $$8.7 billion at Q1 2008 to $27bn today.

The IMF earns around 1% on its loans each year, bringing in almost $270m this calendar year.

"Furthermore," Virtual Metals goes on, "outstanding loans are likely to rise as the financial crisis deepens...[and] in this particular environment the US Congress – which can exercise a veto – might see less reason for IMF gold sales."

Meantime, "Private investors are adding gold in record amounts" while the record highs in non-Dollar currencies are "taking their toll on physical demand," VM adds.

"Imports into India and Turkey have slumped [and] the market is at risk of a sharp reversal if investor sentiment changes. But will it?"

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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