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Gold Retreats on Credit Market Systemic Risk

Commodities / Gold & Silver Jul 02, 2008 - 09:47 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES ticked lower early Wednesday, giving back half of Tuesday's gains to new 11-week highs as crude oil turned higher but Asian stock markets fell yet again.

Despite yesterday's bounce in US equities, "the CDX 5-year investment-grade credit spread widened more than four basis points," notes Manqoba Madinane for Standard Bank in South Africa .


That gives "further warning of increasing systemic risk in the US financial market and could garner more support for precious metals today as investors hedge portfolios against risky equity markets."

Over on the financial markets this morning, Asian equities fell for the seventh time in 10 sessions, extending their worst half-yearly performance since 1992.

The Chinese stock market – which dropped 23% in June and has lost more than 50% for the year to date – fell back to spring '07 levels. In Tokyo the Japanese Nikkei lost another 1.3%, taking its loss for 2008-to-date to more than 13%.

Gold Prices for Japanese investors, in contrast, have risen 7.5% since New Year's Day, breaking back above ¥3,000 per gram in mid-June.

"The current boom represents the first opportunity in 24 years for those who purchased at a variety of prices [up to] ¥3,000 to be able to take a profit," reports Hideya Okamoto, president and CEO of Japanese bullion and jewelry dealers Tanaka Kikinzoku, in the latest Alchemy magazine from the London Bullion Market Association (LBMA).

"Given how long they had to wait for the price to rise, it's perhaps not surprising they were willing to wait patiently for a few more hours in our stores."

Tanaka's six big-city stores were regularly swamped by more than 1,000 customers per day wanting to sell gold between Jan. and March. "Current price levels continue to attract selling," says Okamoto.

But looking at the pattern of retail investment when Japanese Gold Prices retreated from their all-time peak above ¥6,000 per gram of Jan. 1980, "we think that the next sales boom will probably occur when the price rises above ¥3,500 per gram. There will be another wave of selling when Gold surpasses ¥4,000 per gram."

At current exchange rates, those levels would equate to $1,070 and $1,250 per ounce respectively. The world's most powerful central bankers are unlikely to let current exchange rates prevail, however, says BNP Paribas analyst Hans Redeker.

"I'd say after the European Central Bank rate-hike on Thursday, give it another week or two and we'll see co-ordinated intervention," he told CNBC's Squawk Box on Tuesday.

"Forty-five currencies worldwide still use the US Dollar as an anchor. So when you have a weaker Dollar you not only get stronger commodity prices, leading to an inflationary impulse. What you get is an inflation accelerator."

Pointing to the explosion in global food and energy prices, "some countries are at a tipping point," warned Dominique Strauss-Kahn, head of the International Monetary Fund (IMF) at a briefing today.

"If food prices rise further and oil prices just stay the same, then some governments will be unable to feed people and at the same time maintain stability of their economy."

Speaking to Germany 's Die Welt ahead of tomorrow's interest-rate decision in the Eurozone, "if we are not resolute, there is a risk that inflation will explode," says ECB chief Jean-Claude Trichet.

"If we act decisively, then we can master the situation," he believes. But all his decisive jawboning has created so far is a series of Eurozone inflation records, reaching 4.0% in May.

Yesterday the Gold Price in Euros hit an 11-week high of €599 per ounce, more than twice its price from the rate-cutting "deflation scare" of early 2003. ( How come Gold Rises When Interest Rates Lag Inflation ? Get a detailed report here... )

Here in London today, the UK's largest house-builder – Taylor Wimpey – dropped 55% of its value at the opening after admitting the failure of a planned £500 million ($1bn) capital raising.

"Trading conditions [in UK property] have deteriorated at an alarming rate," note analysts at broker Cazenove.

Shares in top food and clothes retailer Marks & Spencer also sank, losing one-fifth of their value after it reported a 5% drop in year-on-year sales and warned of "stormy times ahead" for UK consumers.

Out-of-town shopping malls saw visitor numbers fall nearly 6% this June, according to the Footfall Index from Experian, as petrol prices rose by more than 5% in little more than four weeks.

Across the Atlantic , high gas prices caused US auto sales to collapse to a 17-year low in June as consumers spurned gas-guzzling trucks but found a shortage of fuel-efficient and hybrid cars on offer.

General Motors – now trading at a five-decade low on the stock market – saw truck sales fall 16%, according to AutoData Corp. Its No.1 competitor, Toyota , suffered a 39% drop in truck sales.

Late Tuesday, global coffee giant Starbucks said it will close 600 stores in the US next year. Goldman Sachs believes US unemployment won't improve until late in 2009, peaking above 6.4%.

"The labor market is clearly deteriorating, and it's highly likely to keep deteriorating," says Andrew Tilton, the Goldman economist.

"It's clear that the housing downturn and credit crunch are still very much under way."

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.

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