Gold Dips Again as Oil Rises; US Dollar to "Plunge" if Growth Slows, Inflation Rises

By: Adrian_Ash

SPOT GOLD PRICES ticked lower from an overnight rally in early European trade Thursday, moving from $762 per ounce to $760 by lunchtime in London .

The AM Fix was set at $758.35, the lowest level since Monday morning. The spot Gold Market has now gained $100 per ounce – some 15% – in the last two months.

"Whatever way you look at it there is near-term resistance to a further upmove from a technical point of view," says Phil Smith in today's note for Reuters India.

Noting the rally/decline pattern seen on Tuesday – and repeated yesterday – "this is not constructive price action," reckon the technical team at Mitsui in London .

"But it is difficult to see the precious metals breaking down further whilst the Dollar remains weak and oil is firm after the recent rally on Turkish/Iraqi tensions."

Crude oil rose above $87.80 per barrel this morning as Iraq and Washington pleaded with Turkey not to act on the resolution agreed by politicians in Ankara yesterday of pursuing Kurdish rebels across the border with Northern Iraq.

Members of OPEC also confused the trading pits, after Nigeria 's oil minister said the cartel may opt to raise its output targets at next month's meeting in Saudi Arabia .

An Iranian oil official then rebuked the idea early today, saying there is "no need" to dent the current record-high oil price with increased output.

In Tokyo this morning, gold futures traded for Aug. '08 delivery rose 0.5% to the equivalent of $766 per ounce, while the Nikkei stock index added 0.9%. It remains below the starting level of Jan. 2007, however.

In Mumbai, the Sensex dropped another 3.8% after falling 2.1% yesterday on new government plans to limit foreign investment in Indian assets. European stocks stood 0.5% on average as the US open drew near.

Back in the Gold Market , "we're seeing very little support from physical buyers," said Wallace Ng, chief trader at Fortis Bank in Hong Kong , to Bloomberg overnight, "as the price is running up too fast for them to catch up at this moment."

But the London Bullion Market Association reports that London – home to the world's busiest physical gold-investment trading – saw turnover rise 18% last month by volume, growing 26% by value.

"The number of transfers rose to a daily average of 1,789," says the LBMA, "setting a new high." ( Why do professional gold traders only deal in London bullion – and how you can access the same great prices at low cost? Learn about Good Delivery Gold here... )

On the forex market this morning, the US Dollar slipped, taking the Euro above $1.4250 for the first time since the single currency hit record highs above $1.4283 at the end of Sept.

The British Pound, meantime, briefly spiked above $2.0460 – a two-week high – after new data showed consumer spending growing at a three-year record in Sept.

"This points to [ UK interest] rates staying on hold until next year," reckons Vicky Redwood at the Capital Economics consultancy. But buried beneath the headline numbers, "the evidence of aggressive high street discounting seen here paints a somewhat softer picture," says Richard McGuire at RBC Capital Markets.

"It resonates well with yesterday's survey from the Bank of England's Agents, which noted a slowdown in the value of consumer spending," he adds.

DSG Plc, owner of PC World and Currys – the major electrical chain – warned this morning that first-half profits for 2007 are now set to fall by £20 million (nearly $41m). The International Monetary Fund warns in its latest economic review that the UK housing market is now 40% over-valued.

Today's jump into Sterling , however, helped knock back the Gold Price in British Pounds down towards yesterday's lows just above £370 per ounce, down 1.6% from Wednesday morning's 17-month record.

For German and French investors looking to Buy Gold Today , the price in Euros dropped to €531 per ounce, down €8 from yesterday's early top.

US Treasury bonds ticked higher as the Dollar slid, pushing the 10-year yield five points lower to 4.50% after Alan Greenspan – former chairman of the Federal Reserve – downplayed the threat of a Dollar collapse in private comments leaked to Bloomberg.

China 's huge Dollar position is "already-known information" said "Easy Al" to a group of Asian investors. Greenspan's view is that "markets are clever enough not to overreact."

But governments holding a share of America 's $9 trillion in government debt may disagree. Eisuke Sakakibara, former vice-minister for finance in Japan , told an interviewer today that the US Dollar may "plunge" next year if economic growth in the United States "falls below 1%."

During August, Japan sold $23 billion of US Treasury bonds according to data released this week. China sold another $14.2 billion, and Taiwan quit $5 billion in US obligations.

"These numbers are absolutely stunning," says Marc Ostwald, economist at Insinger de Beaufort here in London . August's total sale of $163 billion in US assets by foreign investors was the first net outflow since 1998.

"Woe betide US Treasuries if inflation does not remain benign," Ostwald warns.

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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