Gold Recovers as Stock Markets Rally; Bond Prices "Simply Not in Line" with Inflation Fears

By: Adrian_Ash

SPOT GOLD PRICES rose all through the Asian and early London sessions on Tuesday, regaining $12 of Monday's $20 plunge to trade at $760 per ounce just ahead of the US open.

" Spot Gold has not been this high since 1980," notes Christopher Langguth of last week's closing level in his latest technical analysis for Mitsui.

"There is no resistance and the last objective is $875 [on Langguth's charts]. Whether or not it reaches the target remains to be seen but there is no weakness and no reason to sell now."

European stock markets also jumped early Tuesday – and bond prices slipped back – catching up with Monday's late action in New York and the stronger-than-forecast earnings reported overnight by tech-stock leader Apple Inc.

Wall Street futures pointed higher, with new earnings results due from Amazon, AT&T, DuPont, United Parcel Service (UPS) and Unisys.

Gold futures traded in Tokyo had earlier ended the session little changed. The Nikkei stock index also held flat after dropping 2.2% yesterday.

India's domestic Gold Market , meantime, saw spot prices rise by 0.4%, while the Sensex equity index in Mumbai put in its best one-day performance ever, shooting nearly 900 points higher to close within striking distance of a new all-time high.

"Marketmen said revival of buying by jewelry fabricators and local parties ahead of Diwali boosted the trading sentiment," reports LiveMint, the Wall Street Journal 's local service in Mumbai.

"They said a steep fall in previous day's trading also attracted local customers to buy at existing low levels."

Diwali, the Hindu festival of light, will take place on Nov. 10th. It traditionally spurs the heaviest demand for Gold Buying by consumers in Indian, the world's hungriest market for physical gold.

In Europe, the US and Japan, meantime, "a number of investors seem to be increasingly aware of [credit and US Dollar] issues," writes Nikos Kavalis in the latest monthly report from the GFMS consultancy in London.

Investors are also "gradually more skeptical of traditional investment and savings vehicles," he adds.

"After years of aggressive 'yield-hunting' and, arguably, credit risk under pricing, a move away from risky assets and into safe haven instruments is beginning to gather momentum."

Kavalis now reckons the Gold Price will average $700 per ounce or more in the second half of 2007. BMO Capital Markets in the United States today raised its 2008 and 2009 forecasts to $800 per ounce, increasing its silver and platinum targets alongside since "other precious metals prices cluster around the broad trends set out by gold."

At the London Metal Exchange today, copper prices bounced from a one-month low, leading a rally in all base-metal prices. Wheat, corn and soybeans also rose on the world futures market, while crude oil prices snapped a three-day losing run to break above $86.50 per barrel.

On the currency market, the Euro reversed the sudden fall seen vs. the US Dollar on Monday, breaking back above $1.4270 by lunchtime in Frankfurt.

The British Pound also rallied, gaining nearly 2.5¢ from Monday's low to breach $2.0500 for only the third time ever since 1981. For Sterling investors wanting to Buy Gold Today , that capped the price below £371 per ounce.

Gold Priced in British Pounds reached an all-time high above £380 per ounce in May 2006.

"Inflation is back on everyone's lips," says Peter Schaffrik at Dresdner Kleinwort in Frankfurt, one of 32 banks set to bid for inflation-linked German government bonds tomorrow.

Wednesday's auction will see the debut of 5-year inflation-linked Bunds, tied to the official rate of Eurozone inflation. It rose to a 12-month high of 2.1% per year in Sept.

"Bonds have gained far too much given the inflation outlook being communicated by the European Central Bank," agrees Michael Markovic at Credit Suisse in Zurich.

"Inflation fears are simply not in line with the bond market rally we saw in the last few days."

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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