Gold Falls vs. the Dollar, But Holds Steady in Euros; Hits New 23-Year High for Japanese Buyers

By: Adrian_Ash

SPOT GOLD PRICES fell in early trade on Monday, slipping 0.5% in Asia and then dropping further to bounce off $736.50 twice in London this morning. That level also marked the AM Fix in London , recording a loss of more than $9 per ounce from last week's start.

The early drop cut only 0.85% off the Gold Price in British Pounds , however, as the Dollar rallied on the forex market. The Gold Price in Euros was barely changed.

"Gold-favorable factors continue to be in place," writes G. Chandrashekhar for the Hindu Business Line in Mumbai, "such as high crude prices, geopolitical concerns and strong physical demand.

"Under the circumstances, and notwithstanding short-term corrections, the yellow metal will perform well through the last quarter."

But according to technical analysts, says Chandrashekhar, "there is risk of a correction to $700-710. A close below $722 in the Gold Market would confirm that a deeper correction has begun.

"The bigger picture still points to a run towards $800," he adds. "Strategic buying at every fall may be a good idea."

Outside Japan – where trading was closed on Monday for the national Sports & Fitness holiday – Asian stock markets hit a new record high overnight. The Sydney stock index added 0.7% for the day, despite a report that hiring in Australia's mortgage and retail banking sectors dropped by more than one-tenth in Sept.

Wall Street will open as usual later today, but trading is set be light during today's Columbus Day holiday after last week's new all-time highs on the Dow.

Alcoa Inc – the world's largest aluminum producer – will report its latest results after tomorrow night's close, the first company in the Dow Jones Industrial Average to give its third quarter numbers. Other big names to follow include Monsanto, the agricultural group, and Pepsico, the drinks giant.

"The bar is quite low right now," said one investment strategist to Reuters overnight. "It's not difficult to beat forecasts."

European bourses meantime began the week lower, as the United Kingdom reported a sharp rise in factory input prices in Sept., but slower-than-expected industrial growth. The British Pound slipped after gaining 2.7% against the Dollar over the previous three weeks, dropping to $2.0360. The Euro pulled back half-a-cent to dip below $1.4100.

That kept the Gold Price in Euros above €522.60, barely changed from last Monday's start. For British investors wanting to Buy Gold Today , the week began with a dip below £362 per ounce.

The Japanese Yen slipped to a 7-week low of ¥117.45 per Dollar, capping the drop in Gold Prices for Tokyo investors to just 0.7% from the new 23-and-a-half year high hit at the start of Asian trade last night.

The Bank of Japan will announce its interest-rate policy for the coming month on Thursday. Analysts expect "no change" from the current 0.5%. Before then, however, Tuesday at 18:00 GMT brings the most anticipated official release of the week – the minutes from the Federal Reserve's latest policy meeting.

"It's less likely the economy is going into recession and less likely that the Fed will have to save us," said one bond-fund manager to Bloomberg after last Friday's surprise revision to August's jobs data. Widely assumed to have led the Fed, led by Ben Bernanke, to slash 50-basis points off the cost of borrowing, the number was reversed to show an increase of 89,000, rather than the first fall in non-farm payrolls in nearly four years.

The Fed's desire to cut rates again, however, "will likely be [only] interrupted by false hopes of a housing bottom, fears of a Dollar crisis, or misinterpreted one month's signs of employment gains and faux economic strength," according to Bill Gross, founder and head of Pimco, the world's largest bond fund manager.

"The downward path of US home prices will dominate Fed policy over the next several years, as will the lingering unwind of related financial structures and derivatives that have yet to be discovered by the public, and marked to market by their [off-balance sheet] holders."

Some 2.5 million US homeowners face a sharp increase in their monthly mortgage bills as their "teaser" rates end over the next 12 months.

"The mountain of debt that has been built by the US is inherently deflationary," agrees Richard Russell, veteran investor and chart analyst, in his latest Dow Theory Letter . The United States risks "sinking into a deflationary depression" as a result of the drop in housing sales.

"The choice," Russell concludes, "is inflate or die. Clearly, [Ben] Bernanke has already made his choice. The choice is to inflate."

"Policymakers should not think that the [credit] problems will stay at the desk of the bankers," added Rodrigo de Rato, outgoing head of the International Monetary Fund in an interview with the Financial Times on Saturday.

"Problems are going to come to the real sector, come to the budgets – that is something we keep telling people. The [credit squeeze] is a serious crisis...not a storm in a teacup."

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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