Gold Starts the Week 3.4% Higher; "Dramatic Fall in Demand Not Expected"

By: Adrian_Ash

SPOT GOLD PRICES ticked up to $736 per ounce by lunchtime in London after opening 3.4% higher from last Monday's start and gaining 1.5% for European investors from this time last week.

"We feel inflationary pressure in the world economy has not reduced," says Sahil Kapoor, metals analyst at Kotak in Mumbai , India .

"It will pick up even further in the coming months and quarters as agricultural commodities become more expensive worldwide. Higher crude oil prices will infuse a multiplier effect on other components of total demand in the world, pushing global inflation ahead."

Gold Prices rose more than eight-fold when inflation overtook interest rates in the late 1970s. They very nearly doubled again versus the world's major currencies when the same thing happened – and the interest rates paid to cash savers turned negative after inflation – between 2003 and '06.

"Twenty-four of 30 traders, investors and analysts surveyed by Bloomberg from Sydney to Chicago on Sept. 20 and Sept. 21 advised buying gold," reports the newswire this morning. It cautions, however, that gold "might be poised to fall" as the volume of derivatives betting in Comex gold futures has risen sharply.

Now above 400,000 contracts, "open interest" in the Comex gold futures market may rise by another 20,000 contracts tomorrow, when the Oct. contract expires.

"This bulging gold open interest means a lot of institutions are long and at some point if they want to take profits you could have a good correction," says George Gero of RBC Capital Markets.

But "without doubt," counters Wolfgang Wrzesniok in the latest weekly research for Heraeus, the German refinery group, "the present overall environment, including the fundamentals, speaks more positively for gold than last year's price increase, which was primarily driven by speculators.

"This time, despite the high prices, a dramatic fall in demand is not to be expected. For the moment the mining companies are only waiting for dips to buy back more of their old hedges, while demand from longer-term investors (despite all day-to-day volatility in turn-over) continues to hold nicely. This latter is reflected in the increased demand for bars as well as for the physical-backed exchange-traded funds."

Crude oil prices slipped overnight, back towards $81 per barrel as oil-rig workers got back to work following a tropical storm-scare in the Gulf of Mexico . But wheat futures today rose for the third session running, gaining 2.6% on top of the one-third increase seen since the "credit crunch" hit world financial markets in late July.

Japan 's gold market was closed for a national holiday. The Sydney , Taipei and Bombay stock markets all gained more than 1.4% for the session, while Europe 's leading stock indices recovered an early slip to trade 0.2% higher on average ahead of a quiet week for major economic data releases.

In the broader foreign exchange market, the Euro hit new record highs versus the Dollar above $1.4110. That capped the Gold Price in Euros below €521 per ounce this morning.

For British savers and investors wanting to buy gold, the Sterling Price of Gold began London just shy of £363 per ounce. Last week it hit a 16-month high of £368.

The all-time top for British gold owners came in May 2006 at £380 per ounce.

"We're starting to see a lot of people come through [saying] 'I've pulled money out of my finance company' or 'I don't want to go into one'," says Michael O'Kane, a gold trader at New Zealand Mint.

Reflecting the shift into gold by cash savers worldwide, New Zealand antiques dealer Alwyn Knox also tells ShareChat.co.nz that "we've actually found there is a shortage [of gold items right now] because people are holding onto it as the price is going up."

Gold is "an asset that people want to own as protection for risks they can't really analyze and get their arms around," says Stuart Schweitzer, global market strategist at J.P.Morgan.

For new buyers of gold concerned about joining this autumn's bull run at current prices, "if there's a rule where gold is concerned," he adds, "it's that it doesn't trade predictably."

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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