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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Sell-off from 28year Highs Expected to be Short-lived

Commodities / Gold & Silver Oct 02, 2007 - 12:09 PM GMT

By: Mike_Clark

Commodities Gold
Gold made a new 28 year high close on the COMEX in New York yesterday. It closed at $746.90 and has sold off in Asian and early European trading.

The dollar has rallied and oil sold off which may be leading to profit taking in gold. Gold was due a breather after the large run up in recent weeks and profit taking and consolidation is to be expected.


There is support for gold at $726 and stronger support at previous resistance at $690 to $700 and the 50 day moving average at $693. Gold was up by nearly 11% in September alone and given the size of the run up a consolidation is to be expected.

However, the importance of gold's monthly close above $700 for the first time since 1980 (in January 1980 gold closed at $681.50) is not fully appreciated and will likely lead to gold surpassing its interday high of $850 in the coming months. The importance of this has not been realised but it will have been noted by chartists and technicians and will likely lead to further allocations into gold by retail investors, hedge funds, high net worth individuals and institutions.

Also any sell off is likely to be brief due to robust physical demand being seen even above $700. In a tight supply-demand environment any sort of industrial unrest and 'resource nationalism' in Latin America, Russia or elsewhere internationally will be supportive of the gold price. Another example of this was seen in Peru with the news yesterday that a national strike is planned for November 5 at Newmont Mining Corp.'s Yanacocha mine, reportedly the largest gold mine last year.

The FT reports that European investment banks on Monday were forced to reveal the heavy damage inflicted on their profitability by the recent turmoil in financial markets. Credit Suisse followed UBS with a profit warning. But the announcements prompted a sector share price rally on investor hopes that the disappointing trading statements could signal the worst might be over for the banks by quantifying the extent of fallout from the turmoil.

The ramifications of the credit crisis and Northern Rock run on the bank in the UK continue to be digested. The Telegraph reports that the banking industry has given a lukewarm welcome to the Chancellor's plans to raise the guarantee on savers' deposits to £35,000 but cautioned him against increasing the limit further. The British Bankers' Association said it had not yet been consulted on the reforms to the deposit guarantee scheme, and urged Alistair Darling to commission a full review into the way the financial system and the money markets stumbled amid the Northern Rock crisis.

CBI director-general Richard Lambert said: "The CBI is in favour of protecting 100% of savings up to £35,000 but we need plenty of consultation on any move beyond that. We must make sure that any new scheme will not provide perverse incentives to savers to invest in inappropriate areas and that the changes are affordable for the system." Liberal Democrat Treasury spokesman Vince Cable said: "The Government's chopping and changing commitment to deposit guarantees is so confusing that it seems likely it will undermine stability rather than reinforce it. "Ministers must beware the depositor protection scheme becoming a 'crook's charter' in which dodgy banks attract deposits which are fully protected, lend money recklessly, knowing the Government will always provide a copper-bottomed guarantee."

Forex and Gold
The trade weighted USD index has recovered from yesterday's new all time record low of 77.666. This low was below it's previous all-time low of 78.19 struck on its trade-weighted index in 1992.

The sharply deteriorating US housing market is beginning to affect the wider economy which may necessitate further interest rate cuts. However further interest rate cuts could lead to a run on the dollar and a currency crisis and thus the Federal Reserve has a massive dilemma with no easy solution. One path may lead to deflation and a more stable dollar the other to a declining dollar and stagflation.

However, the dollar does look oversold in the short term and a rally back to previous support at 80 may happen. But the the likelihood of further weakening of the U.S. economy and interest cuts will likely make any reprieve for the dollar brief.

The increasing trend away from the petrodollar and towards a petroeuro or 'petro basket of currencies' (including GBP and JPY) will lead to further pressure on the dollar in the coming months.

Iran has slashed the use of the dollar in payment for its oil exports to 15 percent, an official said this morning, amid growing pressure from the United States on its financial system. The vast majority of transactions for oil from OPEC's number two producer are now being carried out in euro, said Mohammad-Ali Khatibi, deputy head of the National Iranian Oil Company in charge of marketing.

Silver

Spot silver was trading at $13.27/13.29 (1200 GMT).
Silver continues to trade in unison with gold. It outperformed gold to the upside in recent days and is now again outperforming to the downside with its higher beta resulting in another sharp correction.

PGMs
Platinum was trading at $1348/1356 (1130 GMT).
Spot palladium was trading at $348/354 an ounce (1200 GMT).

Oil
Oil prices slipped below $80 a barrel as investors stayed on the sidelines ahead of the U.S. Energy Department's weekly report due Wednesday. Light, sweet crude for November delivery slipped 34 cents to $79.90 a barrel in Asian electronic trading on the New York Mercantile Exchange by mid afternoon in Singapore.

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