Gold Gains for 8th Week in Nine as Oil Rises, Bond Yields Fall; Outpaces All Currencies vs. the Dollar

By: Adrian_Ash

SPOT GOLD PRICES surged to a new 27-year high early Friday, briefly breaking $771 per ounce as the US Dollar sank to new lows on the currency markets.

Oil prices also rose, shooting to a new record high above $90 per barrel as an assassination attempt on Benazir Bhutto, newly returned to Pakistan to discuss power-sharing with the military junta, killed 133 people in Karachi .

Asian stock markets dropped hard on the 20th anniversary of Black Monday – the greatest ever one-day plunge in equity prices – while European stocks struggled to reach break-even by lunchtime in London .

S&P futures pointed lower.

"Gold is still largely a Dollar story," according to Stephen Briggs, an economist at SocGen who ignores the 17-month highs touched overnight by both Euro and Sterling Gold Prices .

"There's a perception in the market that the Dollar is going lower, and people are buying into that," Briggs told Reuters earlier. But people Buying Gold Today are getting much more than a simply Dollar hedge.

Gold Priced in Euros has risen more than 2% since Friday last week, outpacing the single currency's rise to all-time record highs versus the Dollar above $1.4300.

For British investors, spooked by the panic at Northern Rock in Sept. – the first banking run to hit Britain in more than a century – gold has risen by nearly 1.8% over the last week.

The British Pound, meantime, has gained 1.2% versus the Dollar.

Gold has also risen against the "commodity currencies" of Australia and Canada , breaking new 12-month highs vs. the Aussie and reaching a half-year high against the Loonie.

The Gold Price for Canadian investors remains more than 7% off its all-time top of Feb. this year, but only Japanese buyers have seen gold move sideways this week, capping a 10-week bull run that took the metal to a series of near quarter-century highs against the Yen.

Since last Friday, the Yen has rallied from ¥118 to ¥115 per Dollar, very nearly matching the move in Dollar Gold Prices and leaving the metal just 0.9% higher for Japanese buyers.

In Tokyo overnight, gold futures were little changed for the day, while the Nikkei stock index dropped 1.7%. Australia 's ASX 200 fell 0.9%, also led lower by banking stocks. Stock in St.George, the country's fifth-biggest lender, lost 3.2% for the day.

Over in Washington , Ben Bernanke – chairman of the Federal Reserve – will speak at a conference on "Monetary Policy Uncertainty" at 09:00 EST today. But the bond market has clearly decided where it thinks interest rates are heading.

Two-year US Treasuries have shot higher this week, giving bondholders their strongest gains since Sept. 2005, when Hurricane Katrina devastated New Orleans and traders looked for the Fed to slash interest rates in response.

The Fed demurred back then, but it was quick to act when a hurricane hit the financial markets in Manhattan this August. Anticipating more "easy money" ahead, two-year bond yields have been pushed down from above 5.00% in June to 3.91% this morning.

On the futures market, the chance of a further cut in the cost of Dollars when the Fed meets on Oct. 31st is now put at 53%. The US Dollar has dropped nearly 5% of its value against the world's other major currencies since the Fed began cutting interest rates in mid-August.

The spot Gold Market has outpaced all currencies, however, gaining more than 16% vs. the Dollar and rising in eight of the last nine weeks. ( Why is gold rising as interest rates fall? To get the big picture today, plus a gram of free gold stored on your behalf in Zurich, Switzerland, register with BullionVault now... )

"In all likelihood," writes Kevin Plumberg for Reuters, "the US Treasury will not step in to save the Dollar any time soon, and the Bush administration may be the first since the gold standard was dropped in 1971 to not intervene in the currency market.

"In fact, the Treasury has not stepped into the currency market since September 2000, when it helped prop up the Euro."

Finance ministers from the world's seven richest nations may want to discuss the Dollar when they meet in Washington today for the G7 summit. But they're more likely to press China for a revaluation of the Yuan, just as they have done since 2004, when the G7 called for exchange rates to "reflect economic fundamentals".

If the US Dollar, floating freely on the world's currency markets, is already reflecting US fundamentals, the outlook for the US economy cannot be good.

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 2007

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