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Gold Rally Continues as Bonds Fall to Record Lows

Commodities / Gold & Silver Dec 18, 2008 - 10:35 AM GMT

By: Adrian_Ash

Commodities SPOT WHOLESALE GOLD PRICES continued to rise early in London on Thursday, recording the best AM Gold Fix in 10 weeks as European stock markets stalled and government bonds leapt yet again, squashing UK gilt yields to new record lows.


Standing more than 2% above Wednesday AM's level against the US currency, the Gold Price in Sterling raced to fresh record highs above £570 an ounce.

Versus the Euro, however, Gold Bullion slipped as the single currency jumped faster still on the forex market.

"I think the important piece of news is the Fed cutting rates to zero," said Adrian Koh, an analyst at Phillip Futures in Singapore, to Reuters this morning.

"Oil is still on a strong downtrend, yet the Dollar also seems to be slipping, so I guess gold is going to be stretched between the two factors.

"But overall, I think you can say sentiment in gold has improved."

Early action on Thursday saw crude oil hold just north of Wednesday's new four-and-a-half year low beneath $40 per barrel.

Asian stock markets rose, apparently buoyed by hopes of zero interest rates on the Yen, due from the Bank of Japan Friday morning.

The US Dollar today recovered ¥1.5 to the Japanese currency, but the Euro – still paying 2.5% per year thanks to the "vigilant" and much-vilified European Central Bank (ECB) – meantime jumped above $1.4700 for the first time since Sept.

The greenback has now given back two-thirds of its record-fast gains vs. the Euro, starting from mid-July, inside 3 weeks.

Back in the Gold Market , meantime, reports out of Hong Kong today suggest "dishoarding" by jewelers and other large gold stockists this week, taking advantage of the gains in dollar-prices and pushing the premiums charged over Spot Gold prices down from $2 an ounce to 50¢.

US and European Gold Coin buyers, in contrast, continue to face premiums of 6%-plus.

"Gold still attracts buying interest" however, says Ronald Leung, head of Lee Cheong Gold Dealers in Hong Kong – also speaking to Reuters.

"People are not happy to put too much money in the bank."

Fears of outright banking collapse may have subsided this autumn, but the Federal Reserve has now slashed official US interest rates to zero.

The Swiss National Bank cut its key rate to 0.5%. Japan's target interest rate has now been at 0.5% or below since 1995. Here in London, Bank of England policy-maker Charlie Bean tells the FT today that UK rates may soon follow – together with a fresh recapitalization, financed by tax and government debt, of London's ailing bank sector.

Minutes from the BoE's latest policy meeting show the committee considered a deeper cut than the eventual 1.0% reduction at its Dec. meeting.

But the Old Lady held back (get this!) for fear that "going further could cause an excessive fall in the [Pound's] exchange rate."

Today the Pound fell below €1.05 to the Euro, a new record low and down by one-fifth in the last 11 weeks.

Over in the retail market for Gold Investment , meantime, "Demand continues, though not on the high levels seen in recent weeks," reports Wolfgang Wrzesniok-Rossbach in his latest Precious Metals Weekly for Heraeus, the German-based refinery giant.

"Since the production of new bars is still running at full blast, delivery periods [now pegged at 6-8 weeks by Heraeus's Swiss competitors] did not grow any further. That could happen though at the beginning of next year as there is a holiday-related production break coming up."

Looking at the wholesale and US Gold Futures market, Wrzesniok-Rossbach goes on to note the recent "backwardation" in gold prices, with the "forward price lower than the spot price.

"This drew in Germany some serious attention. Some commentators read into it a possible upcoming shortage of physical gold if the situation prevails. [But] we would rather rate this as much to do about nothing."

Future prices for gold – as set by forward contracts – "are simply a function of the difference between the gold lease rates and the Dollar interest rate," notes Wrzesniok-Rossbach.

Gold lease rates have risen recently as gold-lending slowed down and the risk-premium rose. Dollar interest rate has meantime been slashed towards zero by the US Fed, erasing the "cost of carry" for gold buyers on the futures market.

"Should gold be discovered as an investment by a larger amount of investors," however, "it could indeed mean that there is then not enough physical metal available," says Wrzesniok-Rossbach, citing the example of German investors.

If they opted to put 5% of their wealth into gold – the "often recommended" proportion –German investors would required 7,500 tonnes, almost as much as the US Federal Reserve, the world's No.1 hoarder, carries on its balance-sheet.

Best estimates put current private-gold holdings in Germany at 1,500 tonnes. That "obviously leaves a huge gap for the moment that the broad public discovers gold as the ultimate safe haven," the Heraeus analyst concludes.

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 2008

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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