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Gold Buying Strong as Stock Markets Lower on Recession and Inflation Concerns

Commodities / Gold & Silver Jan 31, 2008 - 11:14 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES for immediate delivery of physical metal moved sideways early Thursday, holding between $920 and $927 per ounce as global stock markets fell despite yesterday's fresh injection of cheap money from the US Federal Reserve.


"The character of the bull market in gold seems to be changing," says Richard Russell, author of the widely-respected Dow Theory Letter since 1958. "The change is that I don't sense any 'give' in the metal.

"Can this steady, almost eerie rise continue? How could gold, how could any item, rise from $250 to over $930 without attracting intense interest from the public? Damned if I know, but I can tell you this – somewhere ahead, rising gold will attract the interest of the [wider] public."

Asian-Pacific stock markets managed to recover an early dip to close Tokyo 1.6% higher today. But European equities sank at the open, trading down to a 1.8% loss by the AM Gold Fix in London – set exactly at yesterday morning's price of $923.75 per ounce.

The Gold Price in Euros today slipped to a four-session low of €619.65 as the single currency climbed back above $1.4880 on the foreign exchange market.

The Pound Sterling also recovered the highs it briefly hit after the US Fed's 0.5% rate cut on Wednesday. But that failed to stop the Gold Price in British Pounds rising to £467 per ounce by lunchtime in London , just shy of a new record high.

The FTSE 100 index of blue-chip UK stocks meantime slid 1.7% to near its worst-ever performance for the month of January.

"The problem for [equity] investors is that, while they probably felt a bottom, if not THE bottom, had been touched on Monday or Tuesday last week, there's no impetus to buy when the outlook is so cloudy," says Jeremy Batstone-Carr, head of research at Charles Stanley stockbrokers.

"We're going to have a torrid few months ahead. There's no doubt about it."

A fresh slew of bad news followed the poor US close on Wednesday, pushing Wall Street futures lower again today.

Standard & Poor's said it's reviewing the credit ratings of $534 billion in subprime-related bonds. It also said credit losses at the world's major banks may total more than $265 billion all told.

Fitch then downgraded its rating of the main bond insurance unit at Financial Guaranty Insurance Company (FGIC). And this morning the world's largest bond-insurance firm, MBIA, reported its biggest-ever quarterly loss at $18.61 per share.

The stock closed New York last night worth $13.96.

"In the absence of a credible bailout plan, I think investors and issuers need to assume that MBIA, along with all of the other companies, will face continuing, worsening downgrade pressure all year," reckons Matt Fabian of Municipal Market Advisors in Concord , Massachusetts .

Merrill Lynch's new CEO John Thain told the Financial Times yesterday that an "industry-wide" bail-out for the bond insurance firms is next to impossible.

"The prospects are still very bullish for the precious metals," says today's Gold Market note from Mitsui in Sydney, "but after so much anticipation of the Fed's latest rate decision – and the premium added to the market from the recent difficulties in South Africa – it is possible we will see some further profit taking and a correction in the short term."

Harmony Gold – the world's fifth-largest gold miner – restarted production at most of its operations today following the industry-wide shutdown last week, caused by South Africa 's ongoing power shortages.

The state-owned utility Eskom has promised to restore 90% of the nation's capacity by the weekend. But it desperately needs 15 million tonnes of extra coal supplies over the next 90 days, according to Zoli Diliza, head of South Africa 's Chamber of Mines.

On the other side of the trade, meantime, the Federal Reserve's 9-to-1 vote to cut interest rates to a 30-month low on Wednesday was missed by Bill Poole, head of the St.Louis Fed who voted against last week's extraordinary 0.75% cut, preferring to wait until today's scheduled announcement.

Poole was already set to leave the FOMC in this month's annual rotation, however, and his replacement on the committee – "arch hawk" Charles Plosser of the Philadelphia Fed – chose to vote with chairman Ben Bernanke for lower rates.

The only dissenter was Richard W. Fisher, head of the Dallas Fed. He may also have argued against the Fed's accompanying statement.

"The Committee expects inflation to moderate in coming quarters," the FOMC announced in its press release. But less than two weeks ago, "the growing appetite for raw inputs from the new participants in the global economy represents an inflationary headwind that is unlikely to soon abate," Fisher warned in a speech.

"Income growth in China and India and elsewhere, even if it slows from its torrid pace, is likely to continue raising demand for food and energy."

US inflation was today reported at 2.2% annualized in December. New jobless claims for the week-ending last Friday rose to 375,000, a rise of 17% from the previous week.

Wall Street economists had anticipated only 301,000.

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 2008

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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