Gold Bounces from 5% Loss as Dollar Gains, Eurozone Bonds Fall on Inflation Shocker

By: Adrian_Ash

SPOT GOLD PRICES continued to plunge early Wednesday, bouncing off $792.50 as the Asian session ended – more than $43 per ounce (5.1%) below Monday's two-week top.

After the first hour of London trade, the Gold Price stood nearly 7% below the 27-year high of $845 hit on Nov. 7th. The sell-off following that attempt on gold's all-time peak – recorded back in Jan. 1980 at $850 – was both sharper and more severe than this week's drop so far.

But for now, the only short-term certainty in the Gold Market is strong volatility.

"Energy prices are lower and gold-selling [has been] induced by the volatility created when traders roll over contracts in the futures market," reckons William Kwan, a gold dealer with Phillip Futures in Singapore .

Crude oil today sank below $94 per barrel, its third losing session on the run, after Saudi Arabia claimed overnight that it will have 2.8 million barrels per day of spare capacity by next week. Friday this week will mark the last day that gold futures & options traders can close their December contracts for cash settlement.

The slump in Gold Prices came alongside a strong bounce in the US Dollar, driven by bad news on inflation for European bond investors.

Eurozone money-supply growth shot to 12.3% year-on-year in October – a near three-decade high – the European Central Bank said this morning. Analysts surveyed by Thomson Financial News had expected 11.5% growth.

"Solid anchoring of inflation expectations is all the more important in a period of turbulences associated with this market correction," as Jean-Claude Trichet, president of the European Central Bank, said in a speech on Monday this week.

But the financial turbulence that had pushed investors into government bonds failed to outweigh the growing evidence of consumer-price inflation now hitting Western Europe , led by massive growth in the supply of money.

The rate of return offered by fixed-income bonds moves in the opposite direction to bond prices, and two-year German bund yields rose five basis points to 3.73% by lunchtime in Frankfurt . They had already begun rising from 3.56% on Tuesday after the Federal Statistics Office said that consumer-price inflation in the world's third-largest economy will rise 3.0% in Nov.

That's the highest rate of price increases since Feb. 1994.

Today's money-supply news pushed European government-bond prices sharply lower again – and "a sense of impending inflation is currently influencing German consumers," confirmed the closely-watched German GfK confidence report this morning.

"The positive factors currently evident, such as the sustained improvement on the job market and rising incomes, seem unable to prevent the evaporation of optimism."

The GfK's latest reading of German consumer confidence has now fallen to an 8-month low. The Munich-based Ifo research group said yesterday that confidence amongst German business leaders has dropped to a two-year low.

Today's rush out of Euro-denominated bonds spilled over into the currency market, pushing the Euro itself sharply lower this morning. Down more than one cent vs. the US Dollar inside two hours, the single currency hit a one-week low beneath $1.4730.

Gold Priced in Euros bounced off €537.50 per ounce – some €25 off Monday's opening in Frankfurt – before regaining 0.6% by late morning.

For British investors wanting to Buy Gold Today , the price slid back to £384.50, more than 5% off Monday's new all-time record vs. the Pound Sterling of £404.50 per ounce.

The US Dollar also gained 0.8% against the Japanese Yen this morning, while US Treasury bonds recovered from a sharp sell-off of their own – blamed on "profit-taking" by traders – that hit on Tuesday.

Two-year yields rose 18 points yesterday as money moved out of bonds into US stocks. But Treasury prices rose again this morning as European bonds continued to sell off. Asian and European equity markets were little changed.

"The trend for lower yields is so strong," said one Japanese fund manager to Bloomberg overnight. "I'm buying Treasury bonds because the US economy is slowing."

Today is expected to bring fresh evidence of the looming US recession, with Mortgage Applications data for last week due at 08:00 EST , followed by Durable Goods Orders for Oct. at 09:30 and then Existing Home Sales numbers for last month at 11:00 .

But if inflation is rising fast in Europe , squeezing investors out of fixed-income bonds despite a slowing economy, what inflationary horrors await US Treasury bond holders?

Even after this week's setback so far, the Gold Market has knocked one-fifth off the US Dollar's value since late August.

The US Dollar has also lost one-tenth of its value vs. the Euro in the last four months, too – and that should only exacerbate the impact on consumer prices of crude oil rising from $70 to above $99 per barrel at its height last week.

Indeed, it took a surprising – and highly mysterious – cut to the US inflation figure used by the Bureau of Economic Analysis to save third-quarter GDP growth from sinking to 1.3% annualized.

You can get the full story on The BEA's Statistical Fudge here...

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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