Gold Dips After Overnight Bounce; Central Banks to Stay "On Hold" as Inflation Rises, Growth Slows

By: Adrian_Ash

SPOT GOLD PRICES gave back an early 0.5% rally in London on Wednesday to bounce off $731 just ahead of the US open.

Gold Priced in Euros hit a ceiling at €520 per ounce before slipping back to €517.50. For British investors looking to Buy Gold Today the metal traded at £360 per ounce, more than 1.1% above yesterday's low but still 1.7% off last Friday's top.

"Profit taking after an aggressive rally is quite common," said Pradeep Unni at Vision Commodities to Reuters in Dubai , "especially with gold having gone against gravity for one month in a row.

"But market willingness to buy on any retreat from the highs is still intact and as long as it stays, aggressive sell-offs will be deferred."

Unni pegs support at $725 per ounce, just below Tuesday's one-week low.

In the currency markets, meantime, the European single currency bounced 0.3% from the low it hit late yesterday despite weaker than expected retail sales data and a poor reading on Germany 's service managers' index.

Inflation in the Eurozone rose just above the European Central Bank's 2.0% target in the 12 months to Sept. But "given what's going on in the US and the Euro's strength, the European Central Bank might not be able to raise interest rates this year," reckons Charles Diebel, head of European interest-rate strategy at Nomura in London .

German bund prices rose early Wednesday, pushing yields lower ahead of tomorrow's interest-rate decision from the ECB in Frankfurt . The Bank of England is also expected to keep Sterling base rates on hold, after a new report from the Royal Bank of Scotland showed European service industries growing at the slowest pace in two years last month.

Overnight the Reserve Bank of Australia left its interest rates on hold at 6.5%, despite Australia 's trade deficit nearly doubling in Aug. from July. Consumer spending also grew faster than expected according to data released today.

Wednesday morning on Wall Street will bring the key non-manufacturing index for September, plus a private-sector analysis from ADP Employer Services. It's forecast to show below-average jobs growth last month, according to a Bloomberg survey of economists.

Tuesday's pending US home sales data showed a 6.5% drop last month from August.

"The audacious rise in the Dow industrials to a record [above 14,000] will do little to prevent the millions of new 'For Sale' signs likely to dot US lawns soon," notes Jennifer Ablan for Reuters today.

Back in the Gold Market , meantime, "I still see a bit of selling in the cash market [today] because some people are nervous after the sharp drop," say a bullion dealer in Singapore today.

"But I would think gold still has a chance to go back to $740. I also heard jewelry sales in China are quite good despite the high prices."

In India , the Economic Times warns consumers not to delay their traditional gold buying ahead of the Diwali festival in November.

"The general perception centers around buying jewelry 30-45 days before Diwali to get a good price," says the paper. "However, according to an analysis of price patterns in the past seven years... Gold Prices rose by 2-5 per cent in the 45 days run-up to Diwali in 2000, 2003, 2004 and 2005."

The Central Bank of India today cut its retail-loan interest rate by 0.5% in preparation for India 's post-harvest shopping season. "If banks had been open yesterday, we could have seen a lot more [ Gold-Buying ] orders," said a private-bank dealer in Mumbai to Reuters earlier.

Tuesday was a national holiday in India, so the domestic gold market – which is highly price sensitive, most especially during periods of rising volatility – was closed when world Gold Prices dropped 2.4%, ending their six-week surge.

"Now people are waiting for yesterday's levels to return," the dealer added, but on Wednesday so far, the international price of gold dropped only to $731, against the low seen late Tuesday of $726.

By Adrian Ash
BullionVault.com

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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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