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Gold Dumps $12 Per Ounce After 4.5% Surge as Dollar Hits Crisis; Change in Oil's Currency Regime Now "Inevitable"

Commodities / Gold & Silver Nov 21, 2007 - 08:18 AM GMT

By: Adrian_Ash

Commodities

THE SPOT GOLD MARKET dumped more than $12 an ounce in London on Wednesday morning after peaking at $807.45 late in the Asian session – nearly 4.5% above Tuesday's low.

This wild volatility hit Gold Prices as world stock markets plunged, the US Dollar sank to new all-time lows, and crude oil came within 71¢ of $100 per barrel.


Investec Australia today puts support at $775 and resistance at $805 per ounce. But "the three month trendline [higher] has now broken," counters Phil Smith for Reuters India.

We're seeing "nice technical behavior after the very predictable bounce off that huge resistance at the old 1980 high" of $850, he believes.

On a fundamental analysis, however, today's turbulence in the Gold Market coincides with a genuine crisis in how the world prices crude oil – and with it, the US dominance of finance and politics.

"Some sort of change in currency regimes is inevitable," says Citigroup Global Markets in a note studying the pressure on Middle Eastern oil-producing nations to stop pegging their currencies to the US Dollar.

"The fundamental reasons for a revaluation are so strong."

Last weekend, Iranian president Mahmoud Ahmadinejad argued at a meeting of the Opec oil cartel for a switch to pricing crude in a stronger currency othan the US Dollar. Yesterday, the Al-Riyadh newspaper in Saudi Arabia quoted Abdel-Aziz Aluwaisheg – the Saudi head of research at the Gulf Co-operation Council (GCC) – as saying that his government was considering a revaluation of the Riyal.

In September, the Saudi government broke rank and failed to cut its interest rates alongside the US Fed for the first time. Now "there is a common desire in the GCC to revalue member currencies and shift from a Dollar peg to a currency basket," Aluwaisheg was quoted.

This morning, however – and with the region's Dollar-pegged currencies hitting a series of five-year highs against the greenback – Aluwaisheg has denied the story. But futures markets are now betting on a 3.1% appreciation in the UAE's Dirham and a 2.7% rise in the Saudi Riyal.

The Kuwaiti Dinar – cut free from its Dollar peg earlier this year – today made its second-biggest jump since floating in May, taking its appreciation vs. the Dollar to 5.35% to date.

"It looks like a weak Dollar and strong oil are going to be around for a while and there's been no dramatic change in the Gold Market environment," reckons Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo .

"Moreover, there's no fresh incentive for gold to head much lower."

Gold Priced in Euros peaked this morning at €543.20 as the single currency broke new lifetime highs against the Dollar above $1.4850. For British investors wanting to Buy Gold Today , the price slipped back after failing to hold above £390 per ounce – a five-session high.

Tokyo 's Nikkei average closed the day at a 16-month low, and the Hang Seng index in Hong Kong dropped 4.1% of its value. European stock markets gapped down 1.3% at the opening.

By lunchtime in Paris , the CAC40 index had lost nearly 2% at a two-month low.

"The [finance] market is very nervous," says Jonas Thulin, a strategist at Calyon in New York . "People are holding a sober view that we haven't seen the worst from the subprime and credit issue yet. It's pushed people to buy the Yen and sell risky assets."

The Yen continued to surge against all 16 of the world's most-actively traded currencies early today, pushing the US Dollar as low as ¥108.84 overnight.

The British Pound slipped towards ¥223.00 – its lowest level since August's 10-month low – while the Euro dropped 1.7% to retest support at ¥160.50. The New Zealand Dollar, formerly the "darling" of carry-trade speculators selling Yen to buy higher interest-rate currencies, plunged 3.1% this morning to hit a one-week low of ¥81.60.

At its height, and after a 7-year bull market that saw it double in terms of the Japanese currency, the Kiwi was worth more than ¥98.

As the zero-yielding Japanese Yen was bid higher as a "safe haven" today, government bond prices also continued to surge after the US Federal Reserve cut its economic growth forecast last night.

The Fed's outlook is now for 1.8% growth at worst in 2008, sharply down from the 2.5% minimum forecast as recently as June. Unemployment is pegged to reach 4.9% from the current 4.7%.

Inflation – despite crude oil nearing $100 per barrel – is forecast to evaporate, vanishing from 3.5% in October to average 1.9% in 2008.

Bidding up US bonds to lock in a yield – any yield! – before the Fed next cuts rates in December, investors today pushed the yield on 10-year Treasuries below 4.0% for the first time since June 2005. It had reached a five-year peak in the summer above 5.15%.

Two-year notes rose so fast, their yield lost nine basis points to offer only 3.10%. The latest reading on US consumer-price inflation, on the other hand, now stands above 3.50%. The destruction of wealth now guaranteed by Negative Real Yields will only urge the Opec oil cartel – whose Middle Eastern members alone now sit on $3,500 billion in oil-generated currency reserves – towards refusing Dollars in payment.

The Dollar-pegged economies of the Gulf "face an inflationary threat and do not want to import an interest-rate policy set for the recessionary conditions of the United States ," as Hans Redeker of BNP Paribas put it recently.

Inflation in Saudi Arabia has now reached 4% per year. The United Arab Emirates is suffering 9.3% inflation, a 20-year record. In Qatar , inflation has reached 13% year-on-year.

Kuwaiti central bank governor Sheikh Salem Abdulaziz al-Sabah claimed in October that de-pegging the Dinar from the US Dollar – and pegging it instead a basket of major world currencies – had helped Kuwait reduce its domestic inflation rate, now running near to 5% per year.

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

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.

Adrian Ash Archive

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