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Gold Falls Hard on Stronger U.S. Dollar

Commodities / Gold & Silver 2009 Dec 17, 2009 - 07:36 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD fell hard in Dollars but held flat for non-US investors early Thursday in London following yesterday's Federal Reserve statement on monetary policy.

Vowing to keep interest rates at zero "for an extended period", the Fed said it will withdraw "emergency liquidity facilities" by Feb. 2010 – including the unlimited Dollar-swaps currently offered to central banks globally.


Gold initially rose to $1142 an ounce overnight, but fell back to $1120 by lunchtime in London, unwinding two thirds of this week's 2.9% rally and "continuing the retracement" starting on Dec. 4th according to one bullion dealer.

Government bonds rose as world stock markets fell, but short-term US Treasuries outpaced long-dated debt, pushing the spread between 2-year and 10-year yields out to a new all-time record of 2.76%.

The fast-steepening yield curve signals "inflation worries" according to bond analysts quoted by the newswires today.

Crude oil meantime ticked back towards $72 per barrel and base metals also fell. Agricultural commodities rose, however, taking palm oil to a 6-month high and rubber to a 15-month peak.

Cocoa ticked back from its best level in 32 years.

"Position squaring [in gold] is probably done by now, and trading remains very thin," says Andrey Kryuchenkov at VTB Capital in London.

"Our key support is still at $1110 and we expect more range-bound trading here."

There's been "An interesting spike in volume during this four-day sideways move," notes Phil Smith at Reuters India Technical of US gold futures.

"It likely reflects an increase in two-way trade as some took profits on shorts."

"We are seeing some profit taking" on longer-term bullish bets too, said Anne-Laure Tremblay of BNP Paribas to Bloomberg earlier, because "the Dollar is having a greater sway than sovereign [bond] risk over the gold price."

Standard & Poor's today followed fellow ratings-agency Moody's in downgrading the sovereign government bonds of Greece, pegging them near to "junk" status at BBB+ and noting that "measures to reduce the high fiscal deficit are unlikely, on their own, to lead to a sustainable reduction in the public debt burden."

The Daily Telegraph reports that Spyros Papanikolaou, head of Athens' Public Debt Management Agency, held "back-to-back meetings" with London bankers on Wednesday aimed at averting a flight out of Greek bonds.

A currency strategist with Royal Bank of Scotland said today that the European Central Bank is providing "indirect funding" to Athens.

The ECB is barred from directly aiding its 16 member states by the treaty of European Monetary Union.

"The Greek government privately placed €2 billion ($2.9bn) in a floating-rate note with [domestic] banks," writes RBS's Greg Gibbs in Sydney, and since this news coincided with a commercial-bank refinancing operation by the ECB, "one doesn't have to use much imagination to think where the Greek banks found the funds to pay."

"When push comes to shove," says Gibbs, "the ECB and core nations will feel compelled to support Greece...[which] weakens the outlook for the Euro."

Overnight Thursday the Euro sank to a 5-week low against the Pound and hit a new 15-week low vs. the Dollar, losing more than 2% from yesterday's Frankfurt close.

News meantime spread that four of the six Arab oil states committed to launching a single "Gulf currency" since 2001 have now put a "Gulf monetary union pact into effect," as the Kuwaiti finance minister, Mustafa al-Shamali, told a co-operation summit on Tuesday.

"The Euro is the most logical alternative for those traders, investors and central banks that are looking to diversify from the Dollar," writes Standard Bank strategist Steven Barrow in his client note on Thursday.

"However, this could be undone if fault lines in European Monetary Union open up and swallow some of the Eurozone's fringe countries."

The gold price in Euros today touched its best level in two weeks, briefly trading above €788 an ounce.

British investors now ready to buy gold saw the price ease back from a 1-week high just shy of £700 an ounce – 16% higher from the start of the year.

Analysts speaking to the Financial Times today warned "there is a high risk of more bad budget news from Portugal, Spain, Iceland and the Baltics." But "the greatest risk [to global markets] in 2010 is the US Dollar and the unwinding of the carry trade," counters a new report from Credit Suisse analysts in Hong Kong.

It puts the volume of Dollars borrowed, sold and invested in higher-yielding "risk" assets at between $1.4 and $2.0 trillion.

Standard Chartered Bank said today that global money supply growth peaked in the first-half of 2009, with the M2 measure of notes, coins, bank reserves and private bank deposits now only accelerating in China.

"Bubbles are best identified by credit excess, not valuation excess," said the $4 billion Kynkos Associates' Jim Chanos to CNBC on Wednesday, "and there is no bigger credit excess right now than in China."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly 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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