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Gold on the Slide as Indian Demand Passes Peak with Diwali

Commodities / Gold & Silver Oct 21, 2008 - 10:27 AM GMT

By: Adrian_Ash

Commodities WHOLESALE SPOT GOLD PRICES slid again in London on Tuesday morning, dropping 2.9% towards a fresh one-month low at $776.60 per ounce while the US Dollar rose to its best level since March 2007 and the stock market rally faltered in Europe.


Lower Gold Prices are helping the physical market satisfy its appetite," notes Mitsui, the precious metals dealer in London, pointing once more to the Indian festival of Diwali festival that takes place next Tuesday.

Buying Gold during this Hindu "festival of lights" is deemed to be auspicious. The World Gold Council (WGC) marketing group now expects Indian gold imports this quarter to match last autumn's record levels.

"This demand should act as a cushion to the ailing Gold Price ," says Mitsui's gold note today. "Major support lies at $730 an ounce."

As the Dollar-price of gold slipped today, the US currency also gained on the forex market, rising to its best level vs. the Euro in 19 months and stronger by one-fifth from mid-July.

The Gold Price in Euros – which hit new record highs above €685 an ounce 10 days ago – held above €589. For British investors wanting to Buy Gold today, the wholesale "spot" price bounced off £456 per ounce, five per cent down from this time last week.

Crude oil fell back below $74 per barrel, despite a clear threat that the Opec oil cartel will cur production quotas when it meets on Friday.

Base metals also sold off, led by a 3% drop in aluminum futures.

London's FTSE100 equity index reversed an early 1.5% bounce, while the German Dax turned negative to stand more than 17% lower for October so far.

"We believe the normalization of money markets should support precious metal prices as liquidity returns," says Walter de Wet for Standard Bank in Johannesburg, "[but] a strong Dollar would make large price rallies difficult to sustain."

The $3 trillion now promised by major world governments to shore up their domestic banks continued to reduce money-market interest rates on Tuesday.

The gap between 3-month US Treasury yields and London's inter-bank lending rates dropped to 3.15%, down from the record 4.50% hit at the start of last week. Interest rates on so-called "commercial paper" – meaning short-term debt issued by corporations – fell to a four-month low in New York.

Monday saw US businesses start registering to sell their commercial paper straight to the Federal Reserve, borrowing directly from government coffers for the first time since the Great Depression.

The bankrupt state of Iceland is borrowing $6 billion from International Monetary Fund (IMF) – the first such bail-out of a Western nation since Britain's rescue in 1976.

The French government is pumping €10.5 billion ($14bn) into Paris's six largest banks as part of a €360bn package to support and guarantee their debts.

Greece today agreed a €28bn deal proposal to recapitalize its banking sector.

"The high-leverage model of finance is bankrupt," said Stephen Green, chairman of the $167 billion HSBC bank, to a conference in Dubai last night.

Even so, however, the securitization and re-sale of banks loans will have to continue, he believes, because "you cannot bring the whole of the world's capital markets back on to banks' balance sheets."

But while governments and central banks flood the banking sector with new cash, the world's supply of gold – an alternative to official currency since Gold was Cut Free from the Dollar in 1971 – remains ever-more strictly limited.

"The global financial crisis and sharp falls in metals prices have forced several companies to abandon or put on hold their plans to bring new mines on-stream," reports Reuters today.

EuroMoney's Latin Finance notes that the South American equity market, including the mining sector, is now "littered with unfinished mergers & acquisitions."

South African Gold Mining junior Pamodzi Gold will miss this year's production targets  by up to 45%, says Business Report in Johannesburg, after struggling to raise the R400 million ($38.77m) in new debt.

Four junior mining companies have now postponed their listing on the Johannesburg Stock Exchange (JSE) for 12 months or more due to the global credit crisis.

South African Gold Mining production between June and end-August fell 17.5% from the same period in 2007.

Cost-price inflation in the mining sector worldwide meantime ran to a massive 20% annually on some analyst estimates.

"Physical gold demand looks relatively robust," believes Frederic Lasserre, head of global commodities research at Société Générale in Paris, "but sentiment remains very nervous towards gold at present.

"The nature of last week's sell-off suggests that this represents a buying opportunity [in bullion], but the market may not yet see it that 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.

Adrian Ash Archive

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