Gold Shoots to 4-Month High as European Central Bank Injects $31bn; Interest Rates Put "On Hold"

By: Adrian_Ash

SPOT GOLD PRICES raced to a four-month high against the US Dollar in the first-half of London trade on Thursday, breaking the $685 level seen by many chart-watching analysts as "key" short-term resistance.

"It seems the gold market is ready to go higher," reckons Gerry Schubert, director of metals at Fortis Bank in London .

"The whole upset in the financial markets will ultimately lead to gold strengthening its status as a safe haven."

For British investors wanting to Buy Gold Today the price in Sterling broke through £341 per ounce, while on the currency market, the British Pound dropped nearly a cent below $2.0170 after the Bank of England voted to keep interest rates on hold.

The Bank's decision came despite the UK money supply now surging at a two-decade record. Industrial production, meantime, fell in the last month said the British statistics agency, slipping 0.1% versus the 0.2% growth expected by City analysts.

Over in Frankfurt , the European Central Bank also kept its key interest rate static, while Germany reported a 7% fall in its manufacturing order book during July.

The Euro Price of Gold shot to a new four-month high above €503.40 per ounce, just as Jean-Claude Trichet – president of the European Central Bank – began a press conference covering the European economy and single currency's recent strength.

In the equity markets, Asia stocks had earlier stabilized after falling hard at the open, but the European indices all showed a loss by lunchtime. US stock futures pointed downwards ahead of the open, while the Dollar spiked slightly on the forex market as labor-cost and productivity data for the April-June period came in better than forecast.

"Gold prices continue to be heavily influenced by investor sentiment and movements in foreign exchange rates," said Michael Widmer at Calyon bank to Bloomberg earlier.

"Following the continued problems on the interbank market, which has prompted the ECB to inject substantial amounts of funds into the financial system, today's ECB meeting may give further indications as to how European central bankers see the situation evolving."

The European Central Bank is now facing a growing chorus of politicians and trades union leaders demanding that it cut Eurozone lending rates to prevent the ongoing credit crunch from damaging the region's economy. And while markets may indeed "run on risk" – as Martin McCreevy, the EU's internal markets commissioner, reminded journalists on Wednesday – the threat of a serious banking failure in Germany continues to cause alarm in Frankfurt .

This morning the ECB injected a fresh €42.2 billion ($31 billion) into the Eurozone's money markets after overnight lending rates in the open market spiked sharply higher once again. The fear of default is thus making default only more likely, as banks refuse to lend to each other without charging a premium.

Yesterday the Bank of England finally stepped back from its "Crisis? What crisis?" position, raising the amount of cash available for short-term borrowing by London 's commercial banks. And while trying to ease the world's credit markets with injections of new cash, the major central banks have meantime reduced their gold sales according to data from the World Gold Council.

As of Aug. 28th, members of the Central Bank Gold Agreement remained 100 tonnes short of this year's total sales quota of 500 tonnes. The current CBGA year ends this month.

"It's a positive sign that the central banks have not fully utilized the 500 tonnes limit," says Gerry Schubert at Fortis. But private investors, on the other hand, continue to grow their gold-related investments.

The inventory held in trust on behalf of StreetTracks' shareholders rose to a record 528.36 tonnes yesterday. The action in London on Thursday morning says the new bid for gold from private investors may only be getting started – just as the Indian wedding and festival season creates a surge in physical gold bullion demand.

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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