Gold Rises as European Stocks Miss Out on US, Asian Surge; Also Hits New 17-Month High vs. the Euro

By: Adrian_Ash

SPOT GOLD PRICES continued to tick higher during the Asian and early European sessions on Wednesday, gaining more than $6 per ounce from last night's US close to reach $744 by lunchtime in London.

European stock markets struggled to rise, meantime, despite Tuesday's new record highs in US equities sparked by news that the US Federal Reserve voted unanimously to slash the cost of borrowing Dollars at its Sept.

The MSCI Asia-Pacific index today hit new record highs in turn, with the BSE in Mumbai gaining 4.3% for the session.

In Hong Kong, the Hang Seng index ended the day more than 40% higher since Aug. 20th – a "rocket-like uplift in a financial center [that] stretches credulity" as John Authers puts it in today's Financial Times .

"The Fed minutes from September 18 showed that all members of the rate set committee supported the 50-basis-point rate cut," notes Brandon Lloyd for Mitsui in Sydney, and "this prompted another quick reversal in Gold Market sentiment on Tuesday – increasing expectations that further US rate cuts will occur sooner rather then later to fight off the current credit concerns & slow down in US housing."

According to a report out Tuesday, new housing projects in the Dallas-Fort Worth area fell by nearly 30% during the third quarter from the same period last year. Sales of new houses dropped by 20%. "Homes priced under $200,000 are seeing the biggest decline," notes DallasNews.com.

"The Fed minutes might just be enough to break the Gold Price out of its current consolidation pattern," believes Lloyd, "and position it to test its next $786 target."

In the bond market, however, the Fed minutes failed to reassure investors looking for further rate cuts as early as this month's meeting (Oct. 31st). That drove prices lower for US, Euro and Japanese government debt, and cut the percentage of interest-rate futures betting on "no change" in Oct. up to 64%.

But the Fed did spark a fresh slide in the US Dollar on the currency markets, taking the Euro up to $1.4146 by late lunchtime in Frankfurt . New data also said that growth in France 's industrial production didn't slow as much as analysts had forecast in August.

Those sharp gains in the Euro currency failed to cap the gains in gold for European investors, however, with the Gold Price in Euros recording new 17-month highs above €526.50 per ounce.

The Gold Price in British Pounds also rose 0.8% from Tuesday's weak start, despite Mervyn King – head of the Bank of England – re-stating his commitment to fighting inflation rather than bailing out struggling banks.

Dr.King's speech last night in Belfast fueled expectations that UK interest rates will continue to beat returns on the US Dollar, pushing the Pound Sterling up nearly three cents to $2.0450.

"Almost every actor in this drama saw advantage in cheap money and plenty of it," he said of last month's run on Northern Rock, clearly distancing himself from the UK government's panicked response.

"Just as Bank Rate was not set to insulate the manufacturing sector from the trade deficit...it will not be set now to insulate the banking system from the repricing of risk."

In the broader commodity markets, crude oil futures continued to tick higher, rising above $80 per barrel after Wednesday's US forecast of a colder winter ahead. Copper prices rose in Shanghai trade today even as Southern Copper, the world's fifth-largest producer, signed an agreement with union leaders in Peru and ended a series of strikes at its Toquepala and Cuajone mines.

Soybean futures also jumped after hitting a 3-week low yesterday.

Back in the Gold Market , Tokyo's most-active gold futures contract – currently due for delivery in Aug. '08 – reached a new 22-year high after gaining more than 1.5% for the day.

Platinum futures also rose at the Tocom, nearing a three-month high despite last week's news that Mazda, the Japanese auto giant, has developed a catalyst that cuts platinum and palladium use by up to 90%.

The leading "minicar" producer in Japan , Daihatsu announced a new fuel-cell technology in mid-Sept. that eliminates the need for platinum altogether. Current automobile fuel cells each require around 100 grams of platinum.

Gold futures traded in India rose strongly overnight, with open interest in the Aug. '08 contract growing by 2% from Tuesday's session. But the Indian Rupee also rose sharply following new all-time highs in the Mumbai stock market, hitting its highest level against the US Dollar since March 1998.

That should help reduce gold-purchase costs to Indian consumers as the peak Gold Buying season of Diwali draws near.

And in the gold mining sector, meantime, Newmont Mining Corp. – the world's second largest producer – announced a $1.5-billion bid for Miramar Mining Corp. of Vancouver .

Miramar owns the Hope Bay project in Nunavut , "one of the largest undeveloped gold sites in North America ," according to the newswires today. Newmont said only two weeks ago that it was desperate to replace its fast-shrinking gold reserves.

But as Fabrice Taylor points out in the Toronto Globe & Mail , the 10.6 million ounces of gold at Hope Bay are only "indicated and inferred" rather than "probable or proven".

"Put another way," says Taylor , "the purchase price works out to be about $130 an ounce of indicated and inferred resources – and Newmont is paying in cold hard cash, not shares."

Miramar 's feasibility study of early 2003, made when the Gold Price was nearer $325 per ounce, projected mining costs of $190 per ounce and required $40 million in capital. "The return would be 136% before tax over the first two years," notes Taylor – and "that, you can be sure, was a rosy forecast.

"Furthermore, the study used an exchange rate of 1.6 [USD/CAD], whereas today we have par. Steel was less than $400 per ton then, oil was $30 per barrel and there were no waiting lists for heavy equipment."

What's more, "there are no real synergies in this deal. Newmont has no particular expertise in northern climates. This is a big, bold and risky bet on a rising gold price, and if gold is going up that much – and if Miramar 's ore body is that great – it wouldn't have trouble getting the money to get to production.

"The fundamentals behind gold look good, but the same doesn't necessarily hold for gold shares," Taylor concludes.

"By and large, the metal looks better than the paper."

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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