Gold Recovers One-Third of Monday's 5% Plunge as Yen Retreats; Driven Higher by "Bargain-Hunting & Short-Covering"

By: Adrian_Ash

SPOT GOLD PRICES bounced 1.6% from their overnight low on Tuesday morning, reversing one-third of Monday's $41 plunge to hold above $800 per ounce.

"There seems to be bargain hunters at below $800," said Ronald Leung of Lee Cheong Gold Dealers in Hong Kong earlier. "I think $792 and $793 are the supporting levels.

"It's only a healthy correction, not a bear market. It's attracting some buying interest."

Crude oil prices continued to slip, meantime, dropping to $94.56 per barrel of US light & sweet for Dec. delivery by midday in London .

The Nikkei stock index in Tokyo slipped for the eighth day running, taking its total losses for the year-to-date to more than 12%. Here in London the FTSE dropped 0.3% by late morning. Paris and Frankfurt stocks both lost 0.5% on average.

Wall Street stock futures pointed up after four days of losses, led yesterday by a "Who's Who" of the year's best performers as Reuters puts it, including Apple and Google.

"Having hit the massive technical level of the old 1980 high the Gold Price is correcting," notes Phil Smith for Reuters India today. "Pretty predictable stuff technically, with a level like that always going to be a tough nut to crack.

"As we have said many times it is very possible we retrace to again to test the three-month uptrend line [now around $780 per ounce]. Look for support there."

On the currency markets the Euro bounced back above $1.4600 after hitting a new one-week low of $1.4525 overnight, only to slip back as the session unfolded.

For French and German investors looking to Buy Gold Today , the price bounced off a two-week low of €545 overnight – more than 4% below Monday's opening – to trade at €550 per ounce.

The British Pound also rose, recovering nearly 1.5¢ from its two-week low of $2.0540 and holding the Gold Price in Sterling below £389 per ounce.

Versus the Japanese Yen, the US Dollar regained ¥1 from its 18-month low of ¥109.40 after Yasuo Fukuda, prime minister of Japan since the administration of Shinzo Abe collapsed in Sept., warned currency speculators to "be careful" of backing the Yen to rise.

"In the short term, Yen appreciation would certainly be a problem," Fukuda told the Financial Times . "Any kind of sudden change in exchange rates would not be desirable.

Pointing to the Yen's sudden 18-month highs against the Dollar, "it really is a reflection of the state of the US economy," he went on. "What we can do is limited. But speculative movements, I believe, need to be held in check.

"What I am saying is be careful so that [intervention] will not happen."

Japan now holds $893 billion in foreign currency reserves, much of it in US Dollars. Between 2001 and 2006, Tokyo poured $420 billion into the currency markets, selling Yen in a bid to push it lower.

According to The Economist 's Big Mac Index of purchasing power, the Yen remains more than 25% under-valued today. The British Pound, on the other hand, is now around 22% over-valued against the US Dollar – and yet the cost of living for British consumers continues to rise regardless, driven by near-zero rates of real interest paid on bank savings after tax and inflation.

Consumer Price Inflation in the UK broke back above the Bank of England's 2.0% target last month, driven by the surge in crude oil prices. Ali al-Naimi, the Saudi oil minister, today denied earlier reports that the Opec oil cartel will even discuss raising output quotas to prevent further price gains when it meets this week in Riyadh .

In the Eurozone, meantime, industrial production fell 0.7% month-on-month in Oct., said the statistics agency today. Germany 's much-watched ZEW index of economic sentiment sank to a reading of -32.5, well below both the -20.0 expected and Sept.'s reading of -18.1.

All eyes now are on the US pending home sales numbers due out at 16:00 EST. Analysts forecast a further 2.5% drop in Sept. from August's record 6.5% fall.

Back in the Gold Market , and as the Yen slipped back today from the sudden and shocking "carry-trade" unwinding seen during the previous two sessions, the Gold Price in Yen bounced nearly 2% from its three-week low to trade above ¥88,000 per ounce.

Gold futures traded at the Tocom continued to slip, however, losing another 1.2% today to equal $816 per ounce for delivery in Oct. '08.

"The Gold Market has been long and overbought for quite a long time," said a Hong Kong dealer to Reuters earlier today.

"It's a reverse of direction but we've also seen bargain hunting and short covering at the Tocom."

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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