Gold Opens London at 27-Year High; Western Fund Managers Buy US Bonds, Even as Inflation Rises and Foreign Banks Sell

By: Adrian_Ash

SPOT GOLD PRICES dipped 30 cents below the $700 mark in Asian trade on Monday, only to spike sharply higher before opening the week in London above $706 per ounce – the highest weekly start since Sept. 1980.

Today's Morning Fix of $704 per ounce was the highest since May 17th last year.

"The overhead resistance didn't count for much [last week] with the gold price roaring ahead and pushing all technical factors aside," says Phil Smith for Reuters India's technical report today.

Fifteen out of 26 gold-market professionals surveyed worldwide by Bloomberg now expect the Gold Price to move higher again this week. Only four advise selling, while seven are neutral.

Another survey by the newswire says that bond-fund managers expect the US Federal Reserve to cut Dollar interest rates at least twice before Christmas, despite the inflationary threat posed by crude oil prices – trading at a 5-week high early on Monday – and the growing global wheat shortage.

Gold's last two major bull runs, during the late '70s and again between 2001 and 2006, came as US interest rates slipped below the rate of inflation in living expenses.

In Tokyo today, the Nikkei stock index dropped 2% by today's close – ending at a three-week low – after news that the Japanese economy shrank during the second quarter, contracting by 1.2% against forecasts for 0.5% growth.

Gold futures traded at the Tocom slipped 0.6% to equal to $709.52 per ounce, meantime, and the Japanese currency also pushed back the Dollar to a three-week low beneath ¥113.

Come the start of London trade, the Dollar then dropped to a new one-month low against the European currencies, with the Euro buying just less than $1.3800. One Pound Sterling equaled $2.0300. That put the Gold Price in Pounds Sterling at £348, while French and German investors looking to saw gold trade just shy of €512 per ounce.

The major European stock markets were little changed by lunchtime, despite the 1.7% sell-off in Asian-Pacific equities overnight.

US Treasury bond prices continued to rise, pushing the 10-year yield to its lowest in 19 months. "People are rushing into Treasuries," said one Tokyo trader to the newswires earlier. "Investors want liquidity."

But the threat of inflation continues to mount, even as Western investors pile into fixed-income government debt. Wheat futures today rose to a new all-time high in Asian trade, more than double last Sept.'s price after adding nearly 9% last week on top of the 23% rise seen in Aug.

The US Dept. of Agriculture says that global stockpiles will fall to a quarter-century low by the end of May '08. "Global supplies of wheat are very short," says Takaki Shigemoto, analyst at Okachi & Co. in Tokyo . "At the same time, we can't see any sign of slowing demand."

Meantime, foreign governments – especially those growing rich on oil revenues and the US trade deficit – are looking to cut back on their Treasury bond investments. Holdings of US debt by foreign governments and central banks at the Federal Reserve fell by nearly 4% in August – "the steepest decline since 1992," according to Bloomberg.

Western hedge-fund managers may also struggle to find willing buyers this autumn after reporting sharp losses for last month. Rather than "hedging" the risk of a broader sell-off in the financial markets, the flagship fund run by Paul Tudor Jones dropped 5.5% in August according to investor reports. His group's Raptor fund has now lost 9% of its value since Jan., while the Caxton group's leading fund, directed by Bruce Kovner, lost nearly 5% between July and Sept. Matthew Tewksbury's $3bn investment fund fell by 8%.

The Spot Price of Gold , in contrast, has now gained 10% since the start of this year.

"This reckoning is probably a welcome one but it does not mean that it will be a painless one," says Rodrigo de Rato, managing director of the International Monetary Fund, of the turmoil in global credit markets.

He told the Financial Times that the current credit crunch now represents a "serious crisis".

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 2007

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