Gold Rises Again as Credit Crisis Whacks Stocks; But Could Making the Headlines Signal a Near-Term Top?

By: Adrian_Ash

THE SPOT GOLD PRICE rose steadily in London on Friday morning, adding $6 to its overnight bounce to trade above $794.50 per ounce as stock markets across the world continued to fall hard, led down by banking shares.

After the US stock market lost 2.6% on Thursday, the Japanese Nikkei dropped 2.1% today, falling to a one-week low.

But futures traded at the Tocom Gold Market in Tokyo, on the other hand, slipped only 1.5% from yesterday's new 24-year highs.

Hong Kong and Taiwanese stocks both lost 3.4%, meantime, while here in London, the FTSE100 lost a further 70 points in early trade after losing 135 points yesterday.

The broad European stock market stood 1% lower by late morning in Frankfurt.

"The market was getting a bit complacent," said one equities strategist earlier, "thinking that the Fed will fix everything. It's not going to be that easy."

Shares in Citigroup dropped 7% yesterday after Meredith Whitney – an analyst at CIBC World Markets and a regular Fox News pundit – claimed that the world's largest bank needs "to raise over $30 billion in capital through either asset sales, a dividend cut, a capital raise, or combination thereof."

UBS lost 5.5% of its value after the chief executive admitted that the Swiss wealth management group is still holding more than $40 billion in subprime bonds and collateralized debt.

Washington Mutual, the biggest savings & loan company in the US, sank more than 7% after the Attorney General of New York State accused it of colluding in mortgage fraud.

Northern Rock, the ailing UK mortgage bank, has now borrowed £23 billion ($47bn) in emergency loans from the Bank of England according to a British newspaper report today.

"Every time there's a little bit of trouble in the markets people start talking about renewed chances of [interest] rate cuts," says Mario Innecco, a broker at M.F.Global in London.

"So gold is benefiting as an alternative to the Dollar and a little bit of safe-haven buying."

On the bond market overnight, two-year US Treasuries continued to recover from their mid-week sell off, rising in price to push the yield down to 3.74%. Ten-year US bond yields were little changed at 4.35%. ( How come gold is rising as interest rates fall? Why do falling stock prices push gold higher? To get the facts now, claim this Free Gold Report here... )

On the currency markets today the US Dollar fell back towards new record lows vs. the Euro at $1.4500. The British Pound also rallied towards new quarter-century highs above $2.0850.

For British investors wanting to Buy Gold Today , that move held the price below £380 per ounce. Gold Priced in Euros drifted above the low it hit Thursday, trading at €546 by lunchtime in Frankfurt.

Crude oil meantime ticked higher above $94 per barrel this morning, nearing its fourth consecutive weekly gain, even as production came back online in Mexico – the third-largest supplier to the United States – following a storm last weekend.

"Maybe Saudi Arabia could produce more," said Oman's minister for oil & gas, Mohammed bin Hamad al-Rumhy, to Bloomberg overnight, "but the lack of spare capacity is a major factor."

He said he doesn't know of any oil-producing nation that isn't already running at maximum output.

"As far as the prognosis goes, there does not seem to be any reason for a change in scenario in the Gold Market ," says Wolfgang Wrzesniok-Rossbach in the latest Metals Weekly from Heraeus, the German refining group.

"Surprisingly high demand from the jewelry industry, continual investor-purchases, medium-term foreseeable reduction in central bank sales, and lagging new gold-mining production provide a fundamental basis that should make gold bulls feel happy for the time being.

"And if in addition the US Dollar continues its fall and the oil price spirals simultaneously further upwards, then the chances of a climb up to the 1980's all-time high of $850 an ounce remain bright."

But with the spot Gold Price nearing its 10th weekly gain in eleven – and rising 22% since mid-August alone – a sudden surge in media attention may be ringing the bell for this current bull run.

The Telegraph newspaper in London yesterday ran a full-page story on "the gold rush". USA Today also noted this week's spike to $800 per ounce, as did Der Spiegel in Germany.

Now the BBC is planning to feature the bull market in gold on its main TV news broadcast this evening – and the last time gold made headlines like this, in early May 2006, it promptly lost one-fifth of its Dollar-price inside five weeks.

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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