Gold Hits Two-Day High as Energy Costs Surge; Volatile Gold Prices Keeps Indian Wedding Demand Pent Up

By: Adrian_Ash

SPOT GOLD PRICE reached their highest level in two days above $812 per ounce late Wednesday morning in London , regaining $17 from Tuesday's low as energy costs surged and government bonds were sold off.

"Medium term, consolidation above $745 implies a test of the all-time high and thereafter $1,000 in 2008," say analysts at Barclays Capital in London in a report.

They peg "near-term resistance" in the Gold Market between $812 and $818 per ounce.

"If there's no follow through below $790," added a Singapore gold dealer to Reuters earlier, "we should be able to end the week still above $810.

"I believe this so-called retracement should be a short-lived thing."

Crude oil prices also capped their two-day losing streak in Wednesday's early trade, adding 1.4% to $92.41 per barrel after Abdulla El-Badri – secretary general of OPEC cartel – rebuffed Washington 's demands for higher output quotas when the oil cartel meets in Riyadh this weekend.

There is "not a shortage of oil" in the market at present, he told reporters.

Government debt sold off worldwide, meantime, after Tuesday's late surge in Wall Street stocks. Asian equities picked up where Wall Street's strong bounce left off, driving the Hang Seng index in Hong Kong nearly 5% higher for the day.

But European equities were unable to keep the rally running, giving back an early 1.2% gain to trade barely changed by lunchtime in London after HSBC, the world's third-largest bank, wrote off $3.4 billion in charges for the July to Sept. period.

Chief executive Stephen Green admitted that "I don't think anybody knows" when the credit crunch caused by failing mortgage investments will reach its end. He now expects "more prolonged weakness" lasting into 2008 and perhaps 2009.

Earlier in Tokyo , Japanese stocks had managed to add 2.5% higher for the day, capping the Nikkei's run of eight consecutive losses as the Yen resumed its dive on the currency markets, bolstering the outlook for after Japanese exporters.

The US Dollar also continued to slide in London trade, dropping below $1.4700 per Euro after the Eurozone economies this morning reported stronger-than-expected growth for the July to Sept. period.

US business inventories for Sept. – plus retail sales data for Oct. – are due after Wall Street opens later today.

Wednesday also brings the US Producer Price Index, forecast to show a steep increase for Oct. thanks to the surge in oil prices, and the United Kingdom yesterday reported that Consumer Price inflation was running at a four-month high last month.

Wholesale electricity prices in the UK today leapt 38% to a 20-month high after National Grid – the national network owner – warned of "inadequate system margin" for this afternoon. But speculative hopes of yet-higher UK interest rates to come were dented by a sharp rise in Jobless Claims – up by nearly 10,000 in Oct. against City forecasts of a 6,000 drop.

That news knocked 2¢ off the British Pound inside an hour, pushing it back below $2.0650 and helping the Gold Price in Sterling recover above £392 per ounce. On Weds last week, gold reached an all-time high vs. the Pound above £403.

"It remains to be seen whether this drop in Gold Prices will attract physical buyers again," says Pradeep Unni at Vision Commodities in Dubai . "Near-term psychological support is spotted around $799, a breach of which would take the market to $780."

"As we proceed to the year-end, there could be some more profit taking. These volatilities are symptomatic of investors' desire to lock in profits and adjust portfolios."

Analysts at Mitsui in London note that last week brought "another record gold exchange position" in the futures market, but "the overall growth [in outstanding contracts] was relatively tame at 18 tonnes or 2%.

"The $850 level proved too difficult to surmount last week," Mitsui goes on, "and gold has significantly retreated from this area.

"Is this the retraction that the Gold Market was calling for? It is quite possible that gold will correct back to the $750 area, however in the current obese speculative environment, this is no bad thing for the overall medium and long term bullish trend."

Investors holding shares in the StreetTracks gold ETF sold out so quickly on Monday, they forced the trust to sell almost 11 tonnes of metal.

That unwound the last five weeks of accumulation, taking StreetTracks' total gold holding – used to "track" the Gold Price , rather than actually owned by its investors – down to 588.74 tonnes, a level first reached when gold was trading at $740 per ounce.

Meantime in India – the world's hungriest market for gold jewelry – "people have to buy as the wedding season is starting soon," says Pankaj Agarwal, a bullion trader at Brijwasi in Lucknow .

"But the Gold Price is so unstable that they are unable to make a decision."

"People have to buy for weddings in January," agrees another retailer in New Delhi , but Indian Gold Investment demand is also waiting for a further dip according to Reuters.

The newswire reports gold dealers in Mumbai taking advance orders to Buy Gold if it dips beneath $795 per ounce. Buyers would be keener still below $790.

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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