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Gold Slips Amid Critical Week as Emerging Markets & US Investors Fear "Credibly Reckless" Fed

Commodities / Gold and Silver 2010 Nov 02, 2010 - 09:44 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD retreated from an overnight rally to $1360 an ounce in London on Tuesday lunchtime, slipping back as European stock markets rose for the second day running.

The Euro jumped above $1.40 on the currency market following stronger-than-expected German manufacturing data.



Sterling fell hard on weak UK construction figures, however – taking the gold price in British Pounds back to Monday's 1-week high of £851 an ounce – while crude oil rose together with major-economy government bonds.

Silver prices sat tight around $24.80 an ounce.

"Since seasonality points towards a higher gold price during November," says technical analyst Axel Rudolph at Commerzbank today, "we believe that any corrections will be shallow."

Shorter-term, he expects spot gold "to fizzle out" near last month's all-time high of $1387, but "The psychological $1500 level...remains our medium-term upside target."

Ahead of "the most important week ever" as one wholesale bullion dealer jokes in a note today, exchange-traded investment in gold shrank by 1.5% according to the latest data analyzed by the VM consultancy here in London.

Today's mid-term US election results are followed tomorrow by the Federal Reserve's hotly anticipated monetary policy statement, plus interest-rate decisions in the UK and Eurozone on Thursday, and closely-watched US jobs data on Friday.

Last week's "strong profit taking" by institutional traders in US gold futures contrasted with "strong buying" in Tokyo's gold derivatives market, says VM in its weekly report for ABN Amro bank.

The world's biggest exchange-traded gold ETF – New York's SPDR Gold Shares – ended Monday night unchanged from last week's 5-tonne drop, holding some 1293 tonnes of bullion to back the trust's shares.

"Some level of QE has been built into the gold price," reckons HSBC metals analyst James Steel, who last week forecast that gold prices may dip on a strong Republican win in today's mid-term US elections.

"If we don't get QE [from the Fed on Tuesday], then the market will pull back," Steel says. "A more gradualist, modest approach will keep the gold market steady, slightly higher."

Fifty-three out of 56 economists surveyed by Bloomberg News expect the Fed to re-start its asset purchase program (aka QEII) on Wednesday, with 29 respondents expecting $500 billion of money creation or more.

"The more the West pursues quantitative easing, the more the emerging world, via capital controls, will pursue quantitative tightening," says Stephen King, chief economist at HSBC.

The Reserve Bank of Australia today surprised analysts by raising its short-term lending rate from 4.50% to 4.75% – a two-year high – while India's central bank raised its interest rates for the sixth time this year, again citing strong inflation.

In China, "the current money supply is very high," said People's Bank advisor Li Daokui today, warning that "inevitably [it] will bring about systemic financial risks" as ultra-loose US policy drives speculative flows worldwide.

US investors should "scour every segment of the bond market and the globe" said Pimco strategist Tony Crescenzi to Bloomberg TV on Monday, because they "can't depend on price appreciation...in Treasuries."

"I think a 20% decline in the US Dollar is possible," said his colleague Bill Gross – founder and head of the Pimco bond-fund group – to Reuters yesterday.

"When a central bank prints trillions of dollars of checks, that is a debasement."

China's M2 measure of the money supply swelled by 19% year-on-year in September according to the latest data.

Turkey's financial regulator, SPK, today launched an inquiry into whether comments from emerging-markets investor Mark Mobius of Templeton Asset Management led to a one-day drop of 3% in the Istanbul stock market last week, after he forecast a 15-20% pullback by year's end.

Back in the US, meantime, "If I were Bernanke," writes the Fed chairman's former colleague at Princeton, Nobel prize-winning economist Paul Krugman, "I'd...announce a fairly high inflation target over an extended period...something like 5% annual inflation over the next 5 years.

"It's crucial to understand that a half-hearted version of this policy won't work...The Fed needs to credibly promise to be irresponsible."

By Adrian Ash

BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly 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 2010

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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