Gold Dips Against US Dollar But Gains for European Investors

By: Adrian_Ash

Gold Dips Against US Dollar But Gains for European Investors as Bank of England Lends $3.2 Billion in Emergency Funds

SPOT GOLD PRICES dipped against the US Dollar as London reached lunchtime on Thursday, giving back an initial rally above $666.50 to trade at the day's low of $664.65 per ounce.

European stock markets also gave back early gains to trade near unchanged, while the British Pound fell hard on the currency markets following news that an un-named London institution had tapped the Bank of England for £1.6 billion ($3.2 billion) in emergency funds.

On the inflation front, meantime, wheat prices reached a new record high, and US crude oil futures traded at a 3-week high just below $74 per barrel. Bond traders, however, have raised their bet that the US Federal Reserve will cut Dollar interest rates next month, squeezing the real return earned by savers further still.

"Both the overseas and domestic [Japanese] gold markets have been rocked by external factors," says Takashi Ogura at Kanetsu Asset Management in Tokyo . "There is a sense of unease or hesitation in the market that is making trading difficult."

But any sharp dip in the gold price should be viewed as an opportunity to buy gold, Ogura told Reuters. His long-term view remains bullish.

Tokyo gold futures for delivery in Aug. '08 today rose 0.8% against the Yen, even as the spot price for Japanese investors slipped 0.7%. The Yen also rose in the foreign exchange market, adding 0.7% against the US Dollar – and gaining 1.6% against the Aussie Dollar – after Basis Capital Fund Management, a $1-billion Australian firm, filed for bankruptcy overnight.

Basis had previously warned that subprime losses in one of its funds could exceed 80%.

Shares in the Nikkei stock index meantime gained 1.3%, and the broad MSCI Asia-Pacific index added 1%, after Wall Street closed sharply higher on the promise of a cut in US interest rates.

For European investors wanting to Buy Gold Today , the price continued to gain as the US Dollar pushed both the Euro and British Pound lower. Gold priced in Sterling earlier spiked to touch £332 as the Pound dropped nearly a cent to $2.00430. The Euro Price of Gold stood above €489.20 by lunchtime in London .

On the data front, US economic growth for the second quarter is due today, with economists expecting 4.1% annualized. That's followed by personal consumption and inflation data on Friday. Then comes the long Labor Day weekend, with US markets closed Monday.

Ben Bernanke, chairman of the US Federal Reserve will also make a much-anticipated speech tomorrow – the "most important" since he became Fed chairman, according to the Washington Post – entitled "Housing and Monetary Policy".

Late on Wednesday, a letter sent by Bernanke to Democratic Senator Charles Schumer of New York was released to the press. It said the Fed was "prepared to act as needed" amid the ongoing turmoil in credit markets – and taking the word "act" to mean a cut in Dollar interest rates, those equity traders still at work ahead of the long holiday weekend bid both the Nasdaq and S&P indices more than 2% higher by the close.

"Anytime you hear something out of the Fed that it is monitoring the situation, that is reassuring," says Bennett Gaeger at Stifel Nicolaus, an investment company in Baltimore . "The thought is that they are leaning towards a rate cut."

The price of two-year US bonds was bid higher in anticipation of a Fed rate cut, despite extra supply coming from yesterday's auction of new two-year notes by the Treasury. Yields dropped six points by mid-morning in London , trading down to 4.09% even as oil and soft commodity prices rose.

Futures traders also raised their bets on a cut in Fed interest rates when it meets on Sept. 18th. Interest-rate futures now put the chances of a severe 50-point cut from 5.25% to 4.75% at more than four-in-ten, up from a 36% shot at the close on Tuesday.

To protect themselves against the threat of rising inflation against this backdrop of falling interest rates, private investors in the West may do well to note the strong gold demand coming from Asia and the Middle East . After reporting strong gold demand in India – the world's largest consumer of physical gold bullion – even ahead of the traditionally demand seen during the autumn wedding and festival season, the World Gold Council said on Wednesday that Turkey's bullion imports could set a new record this year.

"Consumption is stronger than last year and as good as 2005," reports Murat Akman, general manager of the World Gold Council's local office said to Reuters in Istanbul.

"The [recent] election has prompted people to put forward their weddings, holidays which boosted the demand. Strong tourist arrivals also helped." Turkey 's gold imports rose 42% to 150 tonnes in the first seven months of this year.

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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