Daily London Gold Market Report - Gold Short-term Weakness

By: Adrian_Ash

SPOT GOLD PRICES held flat from last night's US close by lunchtime in London on Thursday, pulling back $2 from an overnight spike to trade at $675.50 per ounce.

The metal had earlier closed Hong Kong unchanged at the same level. Gold dealers in the crucial Indian market – where jewelry and investment-bar demand accounted for one ounce of gold in every five sold worldwide last year – reported slower sales after gold's recent rally to 11-week highs against the Dollar.

"There might also be a 10-15 days delay in the start of the busy season this year as the [Hindu] festivals are delayed," said Mayank Khemka of Khemka International to Reuters India. "But that doesn't reduce the overall demand."

Tokyo gold futures for June '08 delivery lost 0.4% against the Yen today, bringing the losses since Monday to 1.6% after last week's 2.0% gains. The most actively traded Tocom gold futures contract ending the session equal to $684.50 per ounce.

"Gold's demise yesterday was not solely linked to the Euro," says today's technical note from Standard Bank in Johannesburg , commenting on Wednesday's near $10 loss. "It was perhaps also a liquidity play in the market.

"Investors' confidence has obviously been affected by the subprime mortgage credit crunch gathering pace, and this in turn had led global stocks being sold off on Tuesday night. Gold saw good profit-taking yesterday, potentially from funds looking to raise cash and pull in capital invested into risky assets such as commodities and global stock markets before the true effect on the US housing downturn has been assessed."

On a technical level, "this retracement in gold is giving us a signal that gold could be heading towards $671 level on the downside in the interim and potentially target $669 or lower before attempting to make a drive higher again."

Yesterday's 1.5¢ drop in the Euro/Dollar exchange rate was followed by flat trade early Thursday, with the European single currency holding around $1.3710. The British Pound, meantime, continued to pull lower, firmly inside the downtrend begun Monday and reaching a low of $2.0430 as the New York open drew near.

That decline in the Pound kept the Sterling price of gold for British buyers at £330. Eurozone gold investors saw the price trade in a tight range around €493 per ounce.

"If the Dollar's value should continue to rise rapidly it could trigger gold selling by funds," reckons Koji Suzuki, a market analyst at Kazaka Commodity in Tokyo . "The rise [last week] was driven by a weaker Dollar, and now that the US currency is recovering, the Tokyo gold market can't find the incentive to rise for the time being."

Meantime in the stock market, the Tokyo Nikkei index lost 0.9% on Thursday to close at a two-month low. The FTSE in London fell 0.5% after nearing a 3-month low. Nasdaq futures pointed to a higher start in New York after strong earnings results from Apple and Qualcomm.

Zinc, copper and nickel prices rose at the London Metals Exchange. Crude oil prices also rose, adding to Wednesday's gains on the back of poor US inventory data and taking one barrel of WTI Nymex for Aug. delivery to $76.71.

"There needs to be a perception of gold as being a preferred alternative asset," says Bill O'Neill of Logic Advisors in California . "It's not going to go higher just because the Euro rallied against the Dollar.

"The importance of the alternative-asset and flight-to-safety demand was very much shown [recently] by the fact that we had oil pushing well over $70 and the Dollar plunging, and yet gold wasn't catching up."

By Adrian Ash
BullionVault.com

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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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