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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Falls Sharply in Europe

Commodities / Gold & Silver Nov 12, 2007 - 10:21 AM GMT

By: Gold_Investments

Commodities Gold
Gold was down $3.10 to $832.10 per ounce in New York on Friday and silver was up 1 cent to $15.48 per ounce. Gold was up some 3% last week and silver surged by over 6%.

In Asian and European trading both have sold off and gold is down to $815 per ounce at 1230 GMT. Profit taking, a fall in oil prices and tentative dollar strength are likely the primary reasons behind this much anticipated correction. Gold will likely find good support at the psychological level of $800 per ounce.


Gold is down in EUR and flat in GBP. It is trading at £393 GBP (down from £394.60 ) and €560 EUR (down from €566.50). The UK's horrendous trade figures (GBP 7.8 billion in September), with the biggest trade deficit in goods since records began in the late 17th Century brought the pound's recent strength against the dollar and some other currencies to an abrupt halt. Record oil prices and the fact that the UK's North Sea oil production is already in decline (Energy Minister Malcolm Wicks says the national aim is now merely to slow the decline from 8-9% to 5%. Last year production was at its lowest since the first major production year in 1979) are contributing to the large trade deficits. This in conjunction with falling property prices and record debt levels is likely to lead to much lower economic growth in the UK which bodes well for the price of gold in GBP in the coming months.

The FT has a Fund Management Report 'Going for gold - in search of safety' in which Ruth Sullivan writes that investors seeking refuge from a second wave of credit turbulence and a sliding dollar have helped push up the price of spot gold to more than $845 (£403, €576) an ounce, close to an all-time record high, and up more than 33 per cent for the year. "We think we are seeing the end of the US dollar and G7 economy era and investors are reacting by shifting out of dollars and in to the safety of gold," says Giles Conway-Gordon, managing partner of Cogo Wolf Global Strategy Fund, a San Francisco based fund of hedge funds.

Forex and Gold
The dollar has shown tentative signs of recovery against the EUR and has strengthened significantly against the GBP on heavy GBP selling. The euro is at 1.455 (from 1.4751) and at 2.069 (from 2.116).
Doug Noland reports in his Credit Bubble Bulletin that the dollar index fell 1.2% to 75.40 last week. For the week on the upside, the Japanese yen increased 3.4%, the Swiss franc 2.8%, the Norwegian krone 1.6%, the Swedish krona 1.6%, the Danish krone 1.4%, and the Euro 1.4%. Currencies that weakened against the USD were, the Mexican peso declined 1.5%, the Canadian dollar 1.1%, the Australian dollar 1.0%, and the New Zealand dollar 0.8%.

As reported above, GBP has fallen sharply on increasing risk aversion. Investors are exiting carry trade positions whereby they borrowed yen and bought the higher yielding British pound. GBP/JPY has now fallen from a Friday high of nearly 238 to a low in Asia at 228.5. Thus in less than 24 hours of trading GBP fell by nearly 4% against the yen (JPY).

An unravelling of the yen (JPY) and Swiss franc (CHF) humongous carry trades on increasing risk aversion could lead to a currency crisis and systemic issues and it is important to keep an eye on this possibility. Products such as Power Reverse Dual Multi-Callables effectively package up a geared carry trade - (some of them 10 times geared). USD/YEN105 is an important level in this regard. The huge scale and leverage involved could potentially devastate some large hedge funds and banks balance sheets. There are outstanding derivatives of USD402 trillion and this is thus clearly a real risk.

Silver
Silver remains volatile and has corrected after last weeks 6% gain and is trading at $15.05 at 1230 GMT.

PGMs
The non-monetary metals have fallen in conjunction with some other commodities and base metals.
Platinum was trading at $1411/1416 (1230 GMT).
Spot palladium was trading at $364/369 an ounce (1230 GMT).

Oil
Oil prices fell more than $1 a barrel Monday in Asia after reports that the oil exporter group OPEC would discuss increasing its output at an upcoming meeting in a bid to cool record crude prices according to Associated Press. Light, sweet crude for December delivery dropped $1.26 to $95.06 a barrel in Asian electronic trading on the New York Mercantile Exchange by midafternoon in Singapore. The contract rose 86 cents to settle at $96.32 a barrel Friday. Prices could rise ahead of the expiration of options on December crude oil futures Tuesday, with investors holding a heap of $100 call options — which allow traders to buy the underlying futures contract at a predetermined price and date.

 

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