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Gold Oversold as G8 Economies Resemble Titanic Heading for Recession Iceberg

Commodities / Gold & Silver Jul 25, 2008 - 07:43 AM GMT

By: Mark_OByrne

Commodities THE SPOT PRICE OF GOLD BULLION rose early Friday in Asia before slipping 0.5% from a two-day high to head for its second weekly loss on the run in London .

Crude oil ticked 75¢ higher to break above $126 per barrel. Stock markets worldwide fell sharply, sinking 2% in Tokyo and sliding to a six-session low in Frankfurt , Germany .


"Despite a decent range, Gold Trading in Asia was pretty lethargic," reports Mitsui in Hong Kong . "Customer interest was low and traders were laying low."

"There is a little bit of a bounce and the market looks bullish for now," believes Commtrendz in Mumbai.

"I think the market looks a little oversold, short-term. There could have been bargain buying ahead of the weekend, but it's not too strong," says Mark Pervan at ANZ in Melbourne , Australia .

Trading almost 2% above Thursday's two-week low of $917 per ounce, Gold remained more than 10% below its all-time top of mid-March – hit when Bear Stearns was sold to J.P.Morgan in a fire-sale deal.

Rumors in London today claimed J.P.Morgan is now eyeing Halifax-Bank of Scotland . With a market cap' of £10.9 billion ($20bn), the UK 's largest mortgage lender has lost seven-tenths of its value since July '07.

On Monday HBOS placed only 8% of a planned £4 billion rights issue with shareholders.

Thursday saw J.P.Morgan drop almost 7% of its value as US financial stocks suffered their worst one-day fall since 2000 – down 6.7% on average and capping a 30% rally over the preceding five sessions.

Investors fled into fixed-income government bonds, pushing the annual yield offered to new buyers of two-year US Treasuries fully 22 basis points lower to 2.61% – the average yield of the last three months.

Consumer price inflation in the United States was last pegged above 5.0% per year, leaving bond investors and cash savers alike deep under-water.

"Despite booking massive losses, albeit much lower than the average losses in other major precious metals this week, it cannot be ruled out that Gold will not loose some more value," says Wolfgang Wrzesniok-Rossbach at Heraeus, the German refining group based in Hanau .

"[But] the chart currently shows however good support at the $915-mark. It is very possible that for the moment the yellow metal can hold above this level. On the other side, subject of course to political and economical upheavals, the metal could run out of steam for the time being at $965 an ounce."

Today in Zurich , the Swiss central bank admitted a loss of CHF3.4 billion ($3.2bn) for the first half of 2008, blaming exchange-rate investments in Dollars, Sterling , Euros and Yen that turned sour.

The Swiss National Bank (SNB) also said it sold 68 tonnes of Gold in the open market between Jan. and end-June, just over one-fourth of the 250-tonne sales announced last summer.

The Gold Price in Swiss Francs has risen by 21% since then.

On the currency markets today, the Dollar gave back one-half of the gains it made this week's against the major European currencies, pushing the single currency Euro back up to $1.5750.

The British Pound also jumped 0.7%, overcoming both weak economic-growth data and news that four-in-ten UK house sales in some regions are collapsing as buyers back out or fail to arrange mortgage finance.

"An outright recession remains our central scenario," says Paul Dales, UK analyst at Capital Economics in London .

Today in Irvine , California , the RealtyTrac data firm said US home foreclosure filings rose 14% between April and June, more than doubling from the year earlier period to equal one foreclosure for every 171 households in total.

New mortgage lending in the 15-nation Eurozone sank to a record low in June, the European Central Bank (ECB) said today. Inflation in German import prices, in contrast, rose to an eight-year high of almost 9% annually.

The latest Reuters survey of 250 economists worldwide found them universally gloomy on the G8 industrialized nations – "a bit like choosing between deck chairs on the Titanic," according to one analyst.

"The Gold Market chart of 1978 closely resembles the chart of 2008," writes Ron Rosen of the eponymous Market Timing Letter in New York , quoted by Richard Russell of The Dow Theory Letter .

"The patterns, once a breakout above a previous multi-year high occurred, are nearly identical if you compare the first seven months after the breakout to a new all-time high.

"Starting in 1978 gold rose from the breakout price of $192 to the ultimate high of $873. That was an increase of 450%. If the current Gold breakout from the $850 high increases by 450% the ultimate high will be $3,825.

"However, we are living in more dangerous financial times than existed in the 1978-to-1980 period."

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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