Gold and Euro Rally Against Weak U.S. Dollar

By: Adrian_Ash

THE PRICE OF GOLD dipped 0.5% Wednesday morning in London, slipping to $1,012.50 per ounce as Asian stocks closed the day lower but European shares rose.

Government bond prices fell, pushing the yield offered by 10-year US Treasuries back to last week's finish near 3.47%.

Crude oil eased back towards $71 per barrel, and the US Dollar recovered half-a-cent from new 12-month lows at $1.4840 per Euro.

That held the Euro gold price flat at €686.50 an ounce.

"If the market fails to break through the previous record high [at $1,032] it could spark liquidation, which could bring gold back below the $1,000 an ounce very quickly," one European trader told Reuters overnight.

"A failure to move higher in the absence of fresh impetus could cause a correction," agrees MKS Finance – a division of the Swiss refining group – in a note, adding that right now "The gold market is essentially Dollar driven."

But "In our opinion the US Dollar's status as a 'port' in the financial storm has officially come to an end," says Canada's Sprott Asset Management in a new report.

"When the world finally realizes what the US has done to the world reserve currency, international investors will shift into an asset that no government can print."

Due to announce its latest policy stance just after 14:00 New York time on Wednesday, the Federal Reserve has now kept its key interest rate at zero for ten months running.

Buying $800 billion of mortgage-backed bonds to help support that market, the Fed has also bought almost $300bn of US government bonds under its quantitative easing program of creating new money.

Since the program began in March, the US stock market has risen by 60%.

"Even though from a technical perspective the recession is very likely over at this point," Fed chairman Ben Bernanke said in a speech last week, "it's still going to feel like a very weak economy for some time."

"We don't expect the Fed to adopt a hawkish tone [today]," says Standard Bank metals-analyst Walter de Wet in a client note, "and believe those who expect this will be disappointed.

"A dovish tone should be supportive of precious metals. We see scope for much more liquidity to be pushed into the system."

Short-term, "Weak physical demand for gold combined with the rapid rise in speculative activity could give rise to a sharp correction, especially if the US Dollar rallies," warns RBC Capital, pointing to a chart showing what the Financial Times calls a "strong correlation" between the volume of bullish bets held by leveraged speculators in the futures market and the price.

Analysis by BullionVault, however, shows a stronger correlation over the last 3 months between gold prices and the total open interest in gold futures contracts held by both speculators and industry players.

Last week, the correlation between total open interest and the change in gold prices rose to +0.98, just shy of a perfect correlation – under which they would move precisely in lock-step together – of +1.0. (Read more about the apparent Speculative Bubble in Gold here...)

"There are a number of factors supporting where the gold price is today," said Aaron Regent, CEO of the world's largest gold miner, Barrick Gold, to the Denver Gold Forum last week.

"Certainly the economic environment is part of that. It's understandable why gold is where it is."

Charles Jeannes, CEO of world No.3 Goldcorp agreed, says a report from Mineweb, telling delegates that "We're certainly in a rising price gold environment right now.

"There's a lot of reasons to be bullish about gold going forward."

Meantime in India – the world's hungriest physical gold market until slipping behind China at the start of 2009 – "People will pick up gold at around $1,000 levels or even a little above that, provided the market doesn't get volatile," reckons one wholesaler in Jaipur, Rajasthan, speaking overnight to Reuters.

"Demand will be there [during the current festival season, peaking with Diwali in mid-Oct.] but prices have to be stable. Demand was very good yesterday when gold fell below $1,000 an ounce."

On the supply side of the gold market, South Africa's fourth-largest bank – Nedbank – said Tuesday it may only finance large carbon-emitting projects such as mining and electricity production if they commit to reducing their footprint.

"This should eventually raise cost of production at the mining companies," notes Wolfgang Wrzesniok-Rossbach in his Precious Metals Weekly for German refining group Heraeus, "and push the price spiral further upwards."

Latest analysis from market consultants GFMS Ltd. says the average cost of producing one ounce of gold between April and end-June reached $608, "the second highest ever in the history of gold production" according to Wrzesniok-Rossbach.

Only the summer of 2008 showed a higher cash-cost per ounce for gold mining worldwide, "significantly affected by high energy costs and temporarily stronger local currencies of producer nations" such as South Africa, formerly the world No.1 but since pushed into second and then third place by rising Chinese output and a halving of annual domestic production since 1998.

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 2009

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