Gold Falls AHead of US Fed Interest Rate Cut

By: Adrian_Ash

SPOT GOLD PRICES slipped back from an overnight high of $810.50 in early London trade, recording an AM Fix of $806.75 per ounce and then dropping to $804.50 as the US open approached.

Real-estate stocks pulled European equities lower, while oil prices dipped ahead of today's widely-expected cut to US interest rates from the Federal Reserve at 14:15 EST.

"We see the year-end pressures on global liquidity as having potential to force more money into gold," said Investec Australia in a report this morning, "and foresee the recent move as the start of a $20 or $30 move higher over the next couple of weeks."

But looking at the latest data on Gold Market futures, ScotiaMocatta disagrees.

"The market volatility seen in recent weeks is no doubt adding to overall risk reduction in the market," says the bullion bank's report today, pointing to last week's 7% drop in the long positions held by speculative traders.

"The shorts also pared back their holding," ScotiaMocatta goes on, "decreasing them by 7,700 contracts to 15,000 contracts in total."

Overall, however, the futures & options market in gold "remains at lofty levels," says Mitsui, the precious metals group, in its analysis. "It is unlikely that more money will be put on the table before year-end."

China meantime reported inflation at an 11-year high of 6.9% this morning. Bomb attacks in Algiers killed at least 47 people, the second attack on a North African member of Opec since April.

In Germany , the world's third-largest economy, the ZEW index of economic confidence fell sharply in Nov., the research group said today, dropping down to a reading of minus 37.2. Analysts had forecast minus 35.

That wiped out all of Monday's gains in the European single currency, putting it back at $1.4690 and helping to hold the Gold Price in Euros just above €548.50 per ounce.

The British Pound, in contrast, recovered $2.0500 for the first time in a week on news that the UK 's trade deficit shrank slightly in Oct., reaching £4.1 billion ($8.4bn) from Sept.'s £4.6bn deficit.

That accentuated the dip in bullion prices for British investors wanting to Buy Gold Today, taking it below the overnight floor at £394 per ounce.

"The Dollar is a major factor," says Frederic Panizzutti, analyst at MKS Finance in Geneva . "The expectation [of today's US Fed] rate decision is resulting in some positioning in the Dollar and in gold, which is affecting both the markets – the Dollar in a negative way and gold in a positive way."

But with the Federal Reserve set to cut at least 25 basis points off the cost of borrowing Dollars when it speaks at 19:15 GMT today, "lower interest rates may actually be making the economic problem worse, transferring all our wealth to unpleasant oil producing regimes," notes Martin Hutchinson for PrudentBear.com.

Last month Citigroup sold a $7.5 billion stake in its business to the Abu Dhabi Investment Authority. Yesterday, UBS of Switzerland – the world's largest wealth management group – sold a 9% stake in its business to Singapore 's government-owned wealth fund, plus a near-2% stake to a Middle Eastern investor, after admitting to a $10 billion write-down on its own credit-related investments.

Since the start of Oct. alone, says research from Morgan Stanley, banks and government wealth funds from Asia and the Middle East have now invested $18.9 billion into Western finance companies. "It is a further sign of how the balance of the world economy is changing," Gerard Lyons, chief economist at Standard Chartered in London , told the Wall Street Journal overnight.

"Also it is a reflection of the current fragile state of the financial sector in the West. The liquidity and the capital are currently widely available in other parts of the world."

Lacking Asian or petro-Dollars to support it, Société Générale followed HSBC, Standard Chartered and Rabobank on Monday by stepping in to bail out its own off-balance sheet investment fund, currently valued at $4.3 billion.

Citigroup, meantime, has managed to offload $15 billion of assets from its "structured investment vehicles" (SIVs) without resorting to a firesale, says the Financial Times . But Standard & Poor's, the global ratings agency, has now put 18 of these SIVs on "negative" watch, warning that "capital investors in these vehicles [may] see actual losses materialize.

"The SIV as a type of vehicle is unlikely to persist and thus we formally assigned negative outlooks due to the issues in this sector," the agency added.

Between them, the major credit ratings agencies have now issued more than 20,000 downgrades since the summer, led by US subprime-backed mortgage bonds.

Meantime in the Far East – where US Treasury secretary Henry Paulson is visiting Beijing this week – " China needs to be looking to opportunities provided by the weakening US Dollar," says Ha Jaming, chief economist at China International Capital, the country's largest investment bank.

"The government is becoming more interested in channeling money out of the country," he added in an interview last week, after the Beijing authorities issued 20 licenses to Chinese companies wanting to buy overseas asset.

Ha Jaming also said that the Chinese government's own sovereign wealth fund – the $200bn China Investment Corp. – will be a "stabilizing force in investment markets."

But while Asian and Middle Eastern wealth funds are now working to support US and European investment banks, "the Dollar is losing its status as the world currency," warned Chinese central bank director Xu Jian at the start of last month.

"We will favor stronger currencies over weaker ones, and will readjust accordingly," added Cheng Siwei, vice chairman of China 's National People's Congress, when he signaled plans to diversify Beijing 's $1.43 trillion of foreign exchange reserves.

China 's booming economy, meantime, has led to a surge in Gold Buying by private consumers and investors, according to data from the GFMS consultancy.

Demand for gold jewelry is set to rise by one-fifth for 2007 as a whole, said executive chairman Philip Klapwijk last week, "overtaking the United States and coming in No.2 behind India ."

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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