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Gold Slumps as Stock Markets, Euro Rise

Commodities / Gold & Silver 2009 Mar 10, 2009 - 09:48 AM GMT

By: Adrian_Ash

Commodities

THE SPOT PRICE OF gold bullion fell hard Tuesday lunchtime in London, dropping 2.2% to slip below $900 an ounce for the first time in one month.

European stock markets meantime bounced sharply, with London's FTSE100 index extending its best 3-day run in more than five weeks.


The European single currency also jumped, hitting a three-week high of $1.2820 as New York opened for business.

"Despite the short term movements," notes London dealer Mitsui today, "gold remains in a bull market.

"We are reminded of the long-term commitment by some of the recent investors, as the Gold ETF has not seen a major liquidation despite the near $100 decline in price.

"This is once again becoming a healthy market [as] the once over bullish sentiment has now changed.

"The debasement action of the Federal Reserve, bloating the money supply, presents one of the most compelling arguments for an increased allocation to gold – a currency which cannot be printed, either electronically or otherwise."

Looking at the deeper correlation of Gold Prices with other financial markets, "The current lack of buying interest in gold should be put into context," agrees Walter de Wet, senior commodities analyst at Standard Bank.

"The Gold Price remains near all-time highs. At the same time, equities keep falling. The Nikkei is testing 26-year lows, while the S&P is at levels last seen in 1996."

Over the last 30 days, de Wet goes on, "There has been a negative correlation between gold and the S&P, meaning when the S&P falls, gold rises."

"There is no reason why, in stock market terms, things couldn't be even worse now," says Kevin Gardiner, head of global strategy at HSBC, in the bank's latest Equity Insight .

"With some measures of real, 12-monthly US earnings likely to show a bigger decline later this year than occurred after 1929 – and the possibility that 'fair' price/earnings and risk premia in future will resemble those seen before the 1950s dawn of the cult of the equity – we believe there are no convincing 'lines in the sand'."

Economic consensus continues to forecast a rebound in US growth starting this summer, meantime, with a survey by Blue Chip Economic Indicators predicting annualized expansion of 0.5% between July and Oct., followed by almost 2% growth at the end of 2009.

First, however, Blue Chip's survey of 51 forecasters says US gross domestic product will shrink by 5.3% on an annualized basis between Jan. and the end of this month, followed by a 2% decline over the second quarter.

"Consumer spending and residential investment are expected to turn positive and begin boosting GDP growth in the third quarter of this year," the newsletter claims.

Pointing back to the Asian Crisis of 1997-98, meantime, Stephen Roach – chairman of Morgan Stanley Asia – writes in today's Financial Times that "Policies are being framed with an aim towards recreating the boom. It is a recipe for disaster.

"That is not to say that the fiscal and monetary medicine being administered will not alleviate symptoms of distress. But if the policies end up perpetuating the imbalances that got the global economy into the mess, the next crisis will be worse than this one."

Also discussing the Asian Crisis of a decade ago today, "The crises of the 1990s were regional, whereas the current crisis has become global," said Federal Reserve chairman Ben Bernanke in a speech to the Council on Foreign Relations.

"[Today's] global imbalances were the joint responsibility of the United States and our trading partners," Bernanke went on ahead of this coming weekend's pre-G20 summit preliminary summit – "and although the topic was a perennial one at international conferences, we collectively did not do enough to reduce those imbalances."

Looking ahead for Gold in 2009 , "We feel gold will remain highly sought after regardless of whether we see deflation or inflation," says London dealer ScotiaMocatta in its latest Metal Matters comment, "as people seem to be turning to gold as a hedge against money and economic disorder."

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.

Adrian Ash Archive

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