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Gold Bull Market Momentumn Building

Commodities / Gold & Silver 2009 May 08, 2009 - 08:33 AM GMT

By: Adrian_Ash


THE SPOT PRICE of gold rose for the sixth session running on Friday, reaching the best Gold Fix in London in five weeks before dropping half-a-per-cent – and outpacing a drop in the Dollar – as world stock markets and commodities also slipped back.

The Euro jumped above $1.35 to the Dollar for the first since April 5th on news of smaller-than-expected US job losses last month.

That move cut this week's gains for the Gold Price in Euros in half, knocking it back to €677.50 an ounce.

"The strength of gold indicates to us that central banks have succeeded in boosting liquidity," says Steven Barrow, head of currency dealing in London for Standard Bank.

"If this is the case, recent strength in asset prices may not be a flash in the pan.

With crude oil trading back at $58 per barrel – a five-month high – "Market psychology has clearly turned around," reckons Christoffer Moltke-Leth at Saxo Capital Markets in Singapore.

"I could see oil going above $60."

Money continued to quit "safe haven" government bonds, meantime, pushing US Treasury yields up to fresh 6-month highs and further reversing the Federal Reserve's "quantitative easing" of long-term interest rates.

Bond yields move inversely to prices, as the fixed-rate of interest they pay becomes a greater (or lower) percentage of their market value.

"From a technical point of view, German five-, ten- and 30-year yields are now close to very important resistance levels," says a note on the bund market from KBC Bank in Brussels.

"A sustained break above would dismiss our call for range trading."

UK gilts also fell this morning, taking the 10-year yield up to 3.76% – the highest level in 12 weeks – even after the Bank of England raised its "queasing" by two-thirds on Thursday to pump £125 billion of new money into the bond market ($187bn).

"The ECB has resorted to quantitative easing," says Walter de Wet's commodities team at Standard Bank – "an important step, we believe, to provide more upward momentum to the Gold Price.

"From an investment perspective, gold has been building momentum. However, we believe the return of scrap flows to the market, such as was seen in January and February, will be key to gold's momentum.

"We will be monitoring this closely," says Standard Bank, pegging support for Dollar Gold Prices at $909, with resistance at $926 and $935 an ounce.

Also noting the ECB's Switch to Quantitative Easing, "Longer term these policies have the potential to create a very bullish environment for gold as inflation kicks in," agrees Friday's note from precious-metals dealer Mitsui.

"But for now the market is just edging higher."

On the data front this morning, both German industrial output and US employment were less bad than forecast, but still showed sharp rates of contraction.

Losing 539,000 pay-rolls last month, the US economy has now shed 2.5 million jobs since the start of this year.

Germany's industrial production was unchanged in March from Feb., but shrank by more than one-fifth from the same month in 2008.

Over in Tokyo this morning – where Tocom Gold Futures ended the week 3.5% better – Toyota Motor Corp. confirmed its worst-ever losses since launching in 1937, with a $7.7bn loss between Jan. and March.

"Our hope is that banks are going to be able to get back to the business of banking," said US Treasury secretary Tim Geithner in a halting presentation after Thursday's "stress test" results for the top 19 banks were released.

Claiming that the scenarios applied to test the strength of bank balance-sheets were harsh and unlikely, the US authorities have asked America's largest banks to raise an additional $75bn in capital.

"The stress was not much of a stress" however, says Nobel-prize winning economist Joseph Stiglitz.

Ken Rogoff, ex-chief economist at the International Monetary Fund (IMF) told Bloomberg today that "If the banking plan still falls short, the fiscal stimulus will have been wasted to some extent.

"We could end up like Japan, sliding in and out of recession."

But with US interest rates now at a record low beneath 0.25%, "relatively weak revenue growth is likely to be offset by cheap and largely government guaranteed funding," says Goldman Sach's Jan Hatzius, plus "a steep yield curve, and ample spreads on bread-and-butter lending."

By Adrian Ash

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 , 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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