Gold Gains as World Stock Market Falls Following Fed Rate Cut

By: Adrian_Ash

Gold Gains 1.7% from Post-Fed Slump as Oil, Base Metals & Grains Slip; "Double Whammy" Due in 2008 as World Stock Markets Fall

SPOT GOLD PRICES added to their post-Fed recovery early Wednesday, trading more than 1.7% above the overnight low – and well above Tuesday's start – at $810 per ounce as the US open drew near.

"Gold's trend remains positive and there are investors buying on the dips today," said Dick Poon, head of trading at German refining group Heraeus, to Bloomberg in Hong Kong earlier.

"The Fed didn't go for a half-point cut, leading to some long liquidation yesterday. But most of the lost ground has been recovered this morning in Asia ."

The Euro also picked up after its initial shock at the Fed's 0.25% cut to US interest rates, holding at $1.4690 by midday in London , but it failed to cap the Gold Price in Euros below €551.

The FTSE and Dax equity indices both gapped down 1% at the open before rising to see just 0.3% losses by lunchtime. Wall Street futures pointed up after the Dow Jones in New York dropped 294 points on disappointment at the Fed's decision.

"Lower borrowing costs should help promote moderate growth," said the Federal Reserve in Tuesday's statement. But "these guys are academics, they're very far removed," reckons Jim Cramer – the TV analyst who famously screamed at the Fed to slash rates when the credit crunch first bit in August – on CNBC last night.

"The market's reacting correctly. They just made [Treasury secretary] Paulson's job much harder, President Bush's job much harder. Life just got harder for everyone who works at a bank. Everybody's in much more trouble."

"What I'm worrying about now is the weakening Dollar and its potential impact on global growth," said Chen Deming, vice-commerce minister of China , at a meeting with Henry Paulson in Beijing today.

Opening this "strategic economic summit", Paulson had said that "a more flexible exchange rate policy is especially important to China now," pointing to "growing asset bubbles and possible overheating" as well as inflation, now running at an 11-year high.

The People's Bank of China today priced the Yuan at 7.3647 per Dollar, the strongest rate since de-pegging it from the US currency in July 2005. The Hang Seng stock market in Hong Kong dropped 2.4% for the session, while base metals – led lower by zinc – fell hard in Shanghai .

Grain prices also dropped. Soybean futures fell for the first session in five after reaching 34-year highs yesterday, and crude oil prices slid beneath $89 per barrel, even though analysts expect today's US stockpile data to show a slight drawdown last week.

Gasoline inventories are forecast to have risen for the fifth week running.

"Although a recovery in the US Dollar is not impossible – and when it does come it's likely to take us all by surprise – it won't be in 2008," says Jessica Cross of Virtual Metals in her latest Yellow Book analysis of the Gold Market for Fortis, the Belgian investment bank.

"That is an election year, and there will be such pressure from the Republican Party...that the Federal Reserve will do whatever it takes to stave off the threat of recession."

US bond prices rose fast after the Fed's decision Tuesday, pushing the two-year bond yield below 3.0%, and leading economists in New York at UBS, Deutsche Bank and Dresdner now expect the coming slowdown to force the Fed funds rates as low as 3.5%.

Forecasting US interest rates as low as 3% by the end of next year, Jessica Cross sees a "double whammy" for Gold Prices , driven up by both the falling Dollar and a rush of money out of the stock market as cheaper borrowing fails to avert a US recession.
 
"If the Gold Price does not rise to $900 per oz some time in 2008 it will be a great surprise."

Looking at the supply-and-demand dynamics of the physical Gold Bullion market, Virtual Metals expect "little change" in the gold mining sector, where global production has failed to rise in response to rising Gold Prices since the start of this bull market.

South Africa 's gold mining output fell 5.8% in Oct. compared with the same month in 2006 said the statistical agency in Johannesburg yesterday. In 2008, " South Africa looks set to lose to China its top position as largest producer," says Jessica Cross.

Might China 's new dominance of world gold-mining production enable the People's Bank to grow China's gold reserves ? The amounts needed "to make a difference" would be too huge, believes Cross – and "the Chinese will be aware that the European central banks have needed a sales limit in order to exit the Gold Market in an orderly fashion."

But with Chinese gold mining forecast at 260 tonnes per year in both 2007 and 2008, China 's licensing authorities will control 10% of total world output. Leading bureaucrats and politicians have spoken this year of "securing strategic resources" with the $1.3 trillion of foreign currency reserves built up at the People's Bank.

If the Dollar continues to lose value in 2008, what could be more strategic than a strong allocation to physical gold bullion?

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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