Gold Gives Back Early Gains as Dollar & Yen Rally; Oil Rises Again After US Treasury-Bond Yields Turn Negative

By: Adrian_Ash

SPOT GOLD PRICES gave back most of an early $6 rally on Monday morning, trading below $788 per ounce by midday in London after losing 5.7% last week – the biggest one-week decline since March.

Gold Trading volume in London was lighter than usual, with many dealers attending the London Bullion Market Association's conference in Mumbai , India . Dealing was also capped ahead of the long Thanksgiving weekend in the US – due to start Wednesday night – and Friday's Japanese shutdown for the Labor Day holiday.

"Last week's activity pattern is a bearish engulfing," reckons Christopher Langguth in his technical analysis for Mitsui today. Study the Gold Price on the Feb. '08 futures contract, "it implies lower prices will follow," he says.

"Any further weakness should see more long liquidation. There is, however, no reason to be short."

Twenty Gold Market professionals surveyed by Bloomberg News this weekend also believe prices are going to slip further. Ten were bearish; only seven forecast higher Gold Prices.

"[But] last week's loss for gold surprised most of the analysts surveyed Nov. 8 and Nov. 9," the newswire notes. "The survey's forecasts have been accurate in 115 of 186 weeks, or 62%."

Crude oil prices rose sharply overnight, pushing back above $95 per barrel in Asia after the Opec oil cartel addressed the problem of pricing oil in the ever-depreciating US Dollar. Soybean prices neared a new 19-year high, followed higher by corn and wheat.

Japan 's Nikkei stock-market index lost 0.7% for the day, reversing earlier gains as Mizuho Financial – the country's second-largest bank – gave back a 3.4% rally to end the day lower.

European stock markets opened weakly, with London 's FTSE100 sinking nearly 1% as the British Pound failed to hold onto Friday's late bounce after new data showed the average asking price for UK houses falling 0.7% in the last month alone.

"If you have to sell, then seriously consider dropping your price and taking an offer now rather than holding out," says Miles Shipside, director of the RightMove consultancy that compiled the research.

"You could end up being offered even less in a few months' time."

As home prices have fallen, the average time on market for a British home has now risen from 85 to 92 days, the highest figure in Nov. since 2002, back when RightMove began tracking such data in 2002.

Meantime on the stock market, Northern Rock – the first British bank to suffer a run by anxious savers in more than a century – saw its shares plunge another 16% in early trade after it said this morning that all eight rescue proposals received over the weekend were "materially" below NRK's stock-market value at last Friday's close.

Northern Rock has now lost more than 85% of its value since the global "credit crunch" destroyed its aggressive-growth model in August.

Today's poor news from the UK 's real estate and financial sectors knocked one cent off the Pound vs. the Dollar, holding the Gold Price in Sterling above £384 per ounce. For European investors wanting to Buy Gold Today , the metal slipped €2 per ounce from its opening spike in Asia to €541.

Tokyo gold futures were little changed today, with the Oct. '08 contract ending the session equal to $796 per ounce as the US Dollar slipped against the Japanese Yen, nearing last week's 18-month low beneath ¥110.

The Dollar rose strongly vs. the European single currency, however, pushing the Euro down half-a-cent to $1.4630 as the New York open drew near.

"There are still no fundamental reasons to buy the Dollar," as one Japanese fund manager told Reuters earlier – and now the latest survey from the National Association for Business Economics says the number of US economists forecasting a recession has nearly doubled in the last month.

Nine out of 50 economists now put the odds of a US recession during the next 12 months at 50% of above. "More than two-thirds of those polled said the chance of recession was at least 25 percent," reports Bloomberg.

In particular, US auto sales may plummet by as much as 9.4% according to a panel of industry experts gathered at Reuters' "Autos Summit" in Detroit this weekend.

"While I am very negative on the autos sector over the next 12 to 18 months, I'm just not sure how bad it could be," said Jerry York, a former board member at General Motors and chief financial officer at Chrysler.

"We all know housing is a debacle."

"I hope I'm wrong," added Thomas Stallkamp, a former president of Chrysler, "but I think the mortgage issue is going to freak people out and that will hit pretty hard in '08."

US housing data, based on recent home sales and expected building rates, is due out from the National Association of Home Builders at 14:00 GMT today. Tomorrow (Tues) will see the US Census Bureau report New Building Permits and Housing Starts for October at 12:30 GMT .

Minutes from the last meeting of the Federal Reserve – when Ben Bernanke and his team cut US Dollar rates to 4.50% – will follow at 18:00 tomorrow.

In the bond market, however, the price of US Treasury debt – the favored "safe haven" of institutional funds – has now risen so far, so fast, that "it'll be hard for yields to go down further," says Kei Katayama, co-manager of $1.6 billion in Dollar-denominated bonds at Daiwa Securities in Tokyo .

"The short end is especially expensive."

The futures market now puts the odds of a further reduction in the Fed's target interest rate to 4.25% at above nine-in-ten when it meets in Dec. Anticipating that move, two-year US Treasury bonds now yield 1.14% less than the current Fed funds rate.

Short-dated US Treasury Yields Now Pay Less than Inflation too, standing below the latest official reading of the Consumer Price Index. That means bonds are destroying their investors' wealth in the face of record-high oil prices and a growing inflation in world food prices.

"In an environment with low or negative real interest rates," says Eugen Weinberg, a commodities analyst at Commerzbank, "gold performs pretty well," he said.

"I think $850 will pretty much be the level of the Gold Price by the year-end. I still see some upside potential."

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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