Gold and Silver Tumble From Bull Market Highs on Rising Interest Rates

By: Adrian_Ash

THE PRICE OF GOLD continued to fall in Asia and London on Wednesday, dropping 2.8% from Tuesday's new record high of $1430 per ounce as commodity markets also fell and global stock markets stalled.

Crude oil slipped further from yesterday's new two-year highs, but major-economy government bonds also extended their losses, driving 10-year US Treasury yields above 3.20% even as the US Dollar rallied sharply on the forex market.

Spot-market silver bullion prices lost more than 7% from yesterday's new 30-year high above $30.70 per ounce.

The gold price in Euros unwound the last of Monday's 1.9% surge to new record highs, trading back at last week's finish beneath €33,900 per kilo, while the single currency dipped below $1.32 on the forex market.

“Investors [in base metals] are clearly taking profits after the latest high-altitude flight,” reckons Commerzbank's commodities team.

“Liquidity is drying up before year-end, so even the most buoyant of asset classes, such as gold bullion, are affected,” says Jamie Spiteri, head of trading at Sydney's Shaw Stockbroking.

“Some investors who have sold their gold are buying back,” a Hong Kong dealer told Reuters on Wednesday.

“We don't see many people selling scrap gold.”

Scheduled to sell €5 billion in new government debt today, Berlin saw the yield on 10-year German Bunds rise to a 7-month high above 3.00% this morning.

Irish 10-year bond yields held steady above 8%, as the Dublin government won the first vote on its austerity budget announced Tuesday – needed to secure €85bn of emergency finance from Ireland's EU partners and the Washington-based IMF amid what finance minister Lenihan calls the “worst crisis in our history.”

Ten-year UK gilts also fell again in price, pushing their yield to new buyers above 3.50% for the first time since June.

US Treasury bonds fell further too, as the tax-cut and jobless benefit extensions agreed by President Obama and Republican lawmakers late Monday night were estimated at “between $700 billion and $800 billion if ultimately signed into law” according to CNN Money.

“[Coming as] Obama’s deficit panel is trying to find ways to cut the $1.3trn budget deficit, [this] encourages the view that the Administration and Congress are not really interested in reducing the deficit,” says Steven Barrow, chief currency strategist at Standard Bank.

“The Eurozone seems to be in a very different place with its over-zealous deficit-reduction ambitions. [But] one cost of this...is the prospect of haircuts on future debt as policymakers try to shift the burden [of repayments] away from taxpayers.”

Back in the gold bullion market, “Record highs gave way to massive liquidation on Tuesday,” notes a London precious metals desk today, “as New York turned a seller of bonds and commodities.”
The jump in 10-year US Treasury yields to 3.00% and above “was a good enough reason to liquidate positions heading into year end and the selling momentum [in gold bullion] was massive.”

Ten-year US Treasury bond yields today rose 3.25%, their highest level since June.

“After years of conveniently ignoring the issue and instead focusing efforts on pulverizing the Euro area, there appears to be a realization that the US has a massive Federal debt problem,” says Marc Ostwald at Monument Securities in London.

Calling the Eurozone debt crisis a “work in progress”, Ostwald believes that “A test of the 30-year downtrend [in US bond yields and thus interest rates] looks likely to be broken, and a run up to test 5.0% [on the 10-year] will mark the start of a long-term bear trend [in bond prices]...not only in the USA but around most of the G7 and Eurozone.”

By Adrian Ash
BullionVault.com

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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

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