Gold Prices Volatile Ahead of Jobs Data; Gold Miners Hit Trouble Closing Hedge Books

By: Adrian_Ash

SPOT GOLD PRICES flipped around the $800 mark early Friday in London , approaching the US open almost 2% above yesterday's start as key US jobs data loomed.

"Volatility, volatility, volatility," writes Wolfgang Wrzesniok-Rossbach in the latest Precious Metals Weekly from Heraeus.

"For next week we expect Gold Market volatility to remain high [and] despite a possible interest-rate reduction in the USA next week, we can not rule out the metal testing again this week's lows.

"However good support seems to be building-up in the range between $ 770 and $777 an ounce. and while a larger drop down to $740 an ounce can not be discounted completely, even in such a case, the long-term upward trend in Gold Prices remains intact."

Asian stocks failed to capitalise on Thursday's 174-point gain in the Dow overnight – led by President Bush outlining the ' Hope Now ' plan for subprime mortgages – with the Hang Seng in Hong Kong slumping 2.4%.

Crude oil was little changed above $90 per barrel after leaping 3% on Thursday's news that US stockpiles suffered the biggest drawdown in three years last week.

The Euro continued to rise steadily on the currency markets, meantime, recovering an overnight dip from two-day highs around $1.4650 after German industrial output for Oct. beat expectations with a 0.3% drop vs. 0.5% forecast.

"Gold has had a correlation of 0.75 against the Euro-Dollar exchange rate in the past three months," reports Bloomberg today, "up from 0.53 in the prior three months. A reading of 1 would mean the two moved lockstep."

German government bond prices fell on the industrial output data, slipping for the third day running after Jean-Claude Trichet, head of the European Central Bank, said Thursday that inflation remains "the sole needle in our compass."

Yesterday's ECB meeting, which ended with a vote to keep Eurozone rates on hold at 4.0%, even saw some members of the governing council propose a rise to 4.25%. The Bank of England, in contrast, cut UK interest rates for the first time in two years, but the Pound recovered an initial sell-off to trade back above $2.0330 by midday in London today.

That pegged the Gold Price in British Pounds 0.7% lower from Thursday's London close at £393.65. For French, German and Italian investors wanting to Buy Gold Today , the price slipped 0.5% from yesterday's seven-session high at €550 per ounce.

"The ECB at this stage doesn't seem worried about the credit crunch as much as it is about inflation," as Alessandro Tentori at BNP Paribas in London told Bloomberg this morning.

"The bond market is taking stock of the significant revision to inflation expectations next year."

European shares rose strongly, meantime, gaining more than 1% in London and Paris as banking stocks rallied on the US subprime bail-out plan. President Bush said Thursday that Hope Now will help up to 1.2 million homeowners, but Mark Zandi – chief economist for Moody's at Economy.com – puts the true figure nearer 250,000.

"[ US ] home sales are expected to hit bottom in early 2008," Zandi says in a new forecast today, "declining by over 40% from their peak. Effective house-price declines peak to trough will total well over 15%."

Over in the gold-mining sector today, a rock-fall 3,000 meters below ground killed a worker at the Kloof mine in South Africa . Owned and operated by Gold Fields – South Africa 's largest gold miner – Kloof has now witnessed seven deaths since Sept., the company said.

South African mining unions led a strike by 250,000 workers on Tuesday to protest at what they called "mining genocide". The world's major gold mining operators are finding little solace in the rising Gold Price right now, too.

After selling 3,000 tonnes of gold on the futures market by the end of 1999, gold mining companies now face a Gold Price too high to close out their remaining 1,000-tonne hedge books says William Tankard, a senior analyst at GFMS, the widely-respected London consultancy.

"You have had announcements by Barrick [the world's No.1 gold miner] that they are reasonably comfortable with their hedge position," Tankard tells MiningMX.com. "So they have outlined that an elimination of further hedges is unlikely in the near term."

But even if the Gold Market 's 25% surge in 2007 prevents new upward pressure coming from gold miners wanting to buy back their short positions, demand from consumers looks set to rise this month.

"December should see a resurgence in physical demand for seasonal reasons," says today's monthly report from Standard Bank, "notably the onset of the wedding season in India and continued retailer stocking – albeit somewhat modest – ahead of Christmas.

"For the time being, however, buyers are reluctant to enter the market and until they return then Gold Prices will remain under a degree of pressure. The Dollar will be key."

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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