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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Weak on US Stimulus Package

Commodities / Gold & Silver Jan 18, 2008 - 09:41 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES bounced but held inside the week's downtrend early in London on Friday, recording an AM Fix of $872.50 per ounce – the lowest fix in nine sessions.

"Overnight gold traded as low as $870," says today's Gold Market note from Mitsui, "as investors begin to liquidate positions.

"All the precious metals are now looking below to see where the next support level will come from...[and] it is not only a Friday but it is a long weekend in the US. So beware of further volatility today."

For British investors looking to Buy Gold today, however, the price rose 1.2% from last night's 10-day low after the weakest retail data in 12 months knocked the fast-weakening British Pound 1.5¢ lower vs. the Dollar.

Retail sales volumes fell 0.4% in Dec '07, said the official statistics agency, "surely enough to cement a February rate cut and more cuts thereafter," according to Vicky Redwood of Capital Economics.

"Judging by the way the leading indicators are pointing," say analysts at Bear Stearns, "the Bank of England needs to get rates down to at least 4.50%...and probably needs 4.0% rates before it starts to fan some extra stimulus into the economy."

Economic stimulus for the United States is expected today from the White House after chairman of the Federal Reserve, Ben Bernanke, told Congress on Thursday that he would support a presidential package of aid.

"Fiscal and monetary stimulus together" would help the world's largest single economy avoid recession, Bernanke believes, clearly signaling further cuts to the value of the US Dollar ahead.

George W.Bush has already backed government aid for sub-prime US mortgage debtors. Friday he was set to announce $800 tax rebates for individuals and $1,600 rebates for households, plus time-limited tax breaks for business.

Against this inflationary outlook, "gold is taking a breather," believes Carlos Sanchez, an analyst with the CPM Group in New York . "I think people are on the sidelines waiting to see what kind of stimulus plan this will be and where the economy is."

Financial stocks in Europe meantime lost up to 5% of their value by lunchtime today after Thursday's torrid day for bond insurance firms on Wall Street.

The so-called "monoline" insurers – which now provide guarantees worth some $2,400 billion to corporate bond and credit investors – lost up to 44% of their stock-market value when Merrill Lynch blamed $1.9bn of its latest write-downs on the threat of non-payment from ACA.

A "tiddler" in the monoline world, according to the Financial Times , ACA sold $61 billion-worth of protection to 31 counterparties during the first six months of 2007 alone, promising to insure sub-prime and other collateralized debts.

Now classed as "junk" by the leading credit ratings agencies, ACA may be joined by market-leaders MBIA and Ambac Financial after a review of their crucial AAA-rating was announced by Moody's and Standard & Poor's on Thursday.

Without the very highest credit ratings, the monoline insurers would be unable to borrow and finance the insurance pay-outs they've promised, threatening a collapse in global bond market confidence. Whereas gold, in contrast, "has been safe for six generations" according to one Chinese gold-jewelry shopper interviewed by CNN overnight. "Gold never loses its value."

Never mind that Gold Prices go down as well as up – or that they fell for two decades straight starting in Jan. 1980. Chinese consumers, savers and investors are now able to Buy Gold both for investment and jewelry, and not only as physical metal but also via gold futures contracts, listed for the first time last week on the Shanghai Futures Exchange.

"This will be a big, important development for the Gold Market , because for the first time the Chinese can Buy Gold and trade it," says Puru Saxena, the Hong Kong-based money manager. "The Chinese like gold."

On the other side of the trade, meantime, China overtook South Africa to become the world's largest gold-producing nation in 2007, says new analysis from the GFMS consultancy.

Mining a total of 276 tonnes last year, China grew its gold output by 12%. South Africa 's output, in contrast, has now halved from a decade ago.

Total world mining supplies fell 1% in 2007, says GFMS, reaching the lowest levels since 1996.

By Adrian Ash

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 , 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.

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