Gold Slips, Silver Gains with Stocks on Fed's Deflation Warning

By: Adrian_Ash

THE PRICE OF GOLD slipped in early London trade on Thursday, while silver prices rose and Chinese stocks led world equities higher.

Long-dated government bonds ticked down following a raft of better-than-expected European data that also saw the Euro and Sterling both reverse Wednesday's drops vs. the Dollar.

US equity futures pointed to a sharp bounce from yesterday's 1% loss.

"In the near term, silver is likely to lag gold's price performance," says analyst Anne-Laure Tremblay at BNP Paribas, but "if the economic recovery does indeed see a more solid footing in 2011, then we can expect silver to catch up and eventually outperform gold."

Silver prices today recovered to touch last week's finish at $17.90 an ounce, but gold held below $1190 – down more than 4% for July so far – as crude oil rose above $77 per barrel and copper added a further 1.6%.

"We are left searching for a new anchor for gold prices," says new commodities-market analysis from French bank and London bullion dealer Natixis today.

"In the past few months, the sovereign debt crisis in Europe had become the primary driver [but that] correlation has begun to recede...Extreme correlations have [more] recently been experienced between Chinese equity prices and both gold and copper prices."

Noting the 19% fall in wholesale silver trading reported for last month by the largest members of the London Bullion Market Association, however, "This sharp drop is a possible reflection of declining investor interest in favor of other more risky assets," says Natixis' latest Weekly Commodities.

In the wholesale spot gold market, "Gold has not witnessed two consecutive 'up' days since June 25," note Scotia Mocatta's technical analysts, "which indicates continued liquidation of the metal."

Rumors in Asia today said a Tokyo institution "sold gold aggressively in both interbank and [Tokyo's] Tocom gold futures" market, with the "most popular" explanation being that a gold miner was buying back a forward sale made at higher prices, says one Hong Kong dealer.

Reuters said overnight that a poll of 55 gold-market professionals sees gold prices rising some 7% on average to $1228 in 2011. But analysts were split after US Federal Reserve chairman Ben Bernanke called the economic outlook "unusually uncertain".

"The knee-jerk reaction to elevated deflation concerns is gold-bearish," reckons HSBC analyst James Steel. "Investors may also be forced to liquidate hard assets as debt obligations rise in real terms."

But "Resurfacing concerns over another wave of recessionary conditions should keep investment demand for gold firm," believes Rohit Savant at New York's CPM Group consultancy, "as investors look to hedge against financial market volatility and vulnerability."

Having already kept US interest rates near zero for 18 months, and spending $1.5 trillion buying financial assets, "We remain prepared to take further policy actions as needed," Bernanke told the Senate Banking Committee yesterday.

The Fed chairman speaks before US lawmakers again later today.

"Faint-hearted gold investors need to remember that bull markets never move straight up", says precious metals consultant Jeff Nichols in a report for Rosland Capital, quoted by Mineweb.

"When they do, it's called a 'bubble' – and bubbles do burst.  Instead, this [gold] market is moving up just like we predicted: in a stepwise pattern with volatility and big corrections and big potholes on the road to much, much higher prices in the months and years to come."

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 2010

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