Gold and Oil Fall as Pressure Builds for European Interest Rate Cuts

By: Adrian_Ash

THE SPOT GOLD MARKET slipped back from an overnight spike early Monday to hit $778 per ounce – a two-week low – just before the US open.

Asian stock markets were little changed, while European bourses began the week lower. Wall Street futures pointed down, capping their four-day rally, and crude oil futures dropped almost a dollar to trade at a one-month low beneath $88 per barrel.

More than 11% off the all-time record of two weeks ago, oil futures were sold aggressively ahead of this week's meeting of the Opec cartel in Abu Dhabi, which is likely to discuss output quotas, if not actually raise them.

"We feel this is very much a wait and see market," says Brandon Lloyd in his Gold Price report for Mitsui in Sydney this morning.

"As with everything else, it looks like volatility is going to rule the roost. No one trader REALLY knows where anything is going."

After losing value for four sessions running on Friday, Comex Gold Market futures for Feb. delivery jumped $7.70 in Asian trade today, hitting $796.8 per ounce before falling below last week's closing level.

"Everybody is looking for the Gold Price to go down," said one Singapore gold dealer to Reuters earlier this morning.

"Of course this is good for my customers, especially jewelers. In fact, the physical Gold Market is busy with people buying back gold bars.

"We are having good buying from Vietnam , Indonesia and Thailand ."

At the Tocom futures exchange in Tokyo today, the most-active contract (Oct. '08) saw the Gold Price fall 0.5% to equal $798 per ounce as the Japanese Yen bounced on the currency markets.

The US Dollar, having added 3.9% against the Yen since last Tuesday, slipped out of that uptrend, but it kept the Euro near a two-week low at $1.4640.

The British Pound, meantime, leapt more than one cent higher to $2.0630 after last month's Purchasing Managers Index came in well above City forecasts, denting hopes of a cut to UK interest rates when the Bank of England meets this Thursday.

That rise in Sterling , coupled with weakness in the Gold Market , wiped out all of gold's November gains for British investors as it slipped back from last Monday's record high of £404.50 to £377.20 per ounce.

The manufacturing news also pushed UK government bond prices lower, after an early rally saw the two-year gilt yield slip four points to 4.47%. Bank of England interest rates are currently 5.75%, the highest of any G7 economy, and a Bloomberg survey today shows 44 out of 61 professional economists interviewed expect the BoE to keep rates on hold this week.

But London 's interbank borrowing rate closed last week at 5.95%, more than 0.6% higher from the end of Oct., and "policymakers cannot wait to see spillover effects of tighter credit conditions on the economy," says the Bank Credit Analyst .

"Quality spreads have soared and bid/ask spreads have blown out around the world. In Europe , it is alarming that interbank dealing in covered bonds came to a halt last week and planned high-quality debt issuance was cancelled.

"Interbank lending is the main channel through which central banks affect financial markets and the economy. [So] the US Fed needs to cut interest rates promptly, and pressure is building on other central banks to follow suit.”

US home-loan bosses met this weekend to agree a Treasury Dept. plan that could freeze "teaser deal" rates for the next seven years.

Deutsche Bank reckons that Treasury Secretary Paulson's plan is to prevent higher interest rates hurting some 1.2 million families, now holding mortgage loans worth $258 billion.

"The message is that everybody has to get on the bus," one source told Reuters. But any repayment vacation is likely to face legal challenges from mortgage-bond investors – while in the marketplace for mortgage-backed securities last week, a firesale of home-loan bonds by ailing stock broker E*Trade raised as little as 11¢ on the Dollar according to independent analysis.

In the broader commodities sector this morning, grains were mixed while copper and lead prices fell at the London Metal Exchange. Zinc also fell, dipping into last week's gains and taking its losses over the last two months to 16%.

The supply of zinc may rise by more than one-tenth in 2008 according to a new report from UBS today, as 15 new projects come on-stream.

Gold production in Australia , in contrast – the world's third largest producer – held flat between July and October according to a report out today from Surbiton Associates.

Australia produced 61.7 tonnes of gold in the third quarter, around one tonne less than during the second quarter and equal to output to Q3 '06.

"Each year, around 250 tonnes – or eight million ounces, worth more than $7 billion – are mined in Australia and an equivalent amount of gold must be discovered annually just to maintain reserves," said Sandra Close, director of Surbiton Associates, to the Herald Sun .

"In the longer term, there is no substitute for exploration."

News of Australia 's flattening gold output comes less than a week after the Gold Price for Australian investors hit a new all-time record high of A$939 per ounce.

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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