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Gold Slides as Oil & Bonds Fall, Stocks Rally Ahead of Bush's 'Hope Now' Rescue for US Subprime Market

Commodities / Gold & Silver Dec 06, 2007 - 09:21 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES continued to slide early Thursday, falling more than 1% from Wednesday's New York close to trade at $786 per ounce by the time the Bank of England made the first cut to Pound Sterling interest rates in two years at midday in London .


That move – driven by "deteriorated" financial markets and "a tightening in the supply of credit," according to the BoE's statement – drove the Pound to an 11-week low beneath $2.0200 and helped the Gold Price in Sterling to bounce off £388 per ounce.

Crude oil prices also fell, meantime, dropping for the third session running to hit a six-week low more than 13% below their all-time top of mid-Nov.

Asian stock markets ended the day 1.6% higher. European shares rose 0.5% by lunchtime.

"The US Dollar is certain to remain the main price determinant on a short-term perspective" for Gold Investment , said analysts at Commerzbank in a research note this morning.

"We expect new positive momentum on the Gold Market again after the expected interest rate cut on 11 December at the latest."

European government bond prices ticked lower, meantime, ahead of today's interest-rate decision from the ECB in Frankfurt . But with economists split over the central bank's decision (due at 07:45 EST ), the Euro also slid to a one-month low of $1.4525, helping Gold Priced in Euros hold above Monday's low at €540 per ounce.

US Treasuries also fell early today, pushing yields higher as investors awaited full details of the Bush Administration's Hope Now plan to rescue subprime home-buyers.

"This backup in yields is attributable to more details on the Bush Hope Now plan," said Adam MacKillop, a bond-trader for Barclays Capital in Tokyo .

It's a knee-jerk reaction for equities. There's hope, and that's negative for Treasuries generally."

Broad-based commodity indices slid alongside bond prices early this morning, with "falling crude oil prices putting pressure on soybeans and corn" for biofuel production, according to a Japanese trader interviewed by Bloomberg.

"The Dollar's recent strength may also discourage buying interest in commodities," he added.

Zinc futures traded in Shanghai also fell, and copper wiped out an early 1.1% gain to stand 0.4% lower for the session after the People's Bank of China said it will shift from a "prudent" to "tight" monetary stance in 2008 – potentially denting demand for construction materials.

But raising Chinese interest rates six times in 2007 failed to stop the economy growing by 11% annualized. Inflation in the cost of living ran at 4.4% annually in October. New lending by private banks has risen by more than 15% so far this year.

"We believe the language of 'tight monetary policy' used at this conference is merely a retroactive endorsement of what has already been implemented," reckons Jun Ma, chief China economist for Deutsche Bank.

"It simply means that official policy statements sometimes are backward looking...and serve more of a function of political hedge than initiating further policy changes."

China 's booming economy has led to a surge in Gold Buying by private consumers and investors, the GFMS consultancy said yesterday. Demand for gold jewelry is set to rise by one-fifth for 2007 as a whole – and " China is poised to become the world's second largest jewelry market for gold this year," says Philip Klapwijk, executive chairman of GFMS, "overtaking the United States and coming in No.2 behind India ."

"I would expect it to grow further in 2008."

Disposable household income in urban China rose 13.2% between Jan. and Sept., led by the stock market and property boom.

"More economic development in China and a relatively higher savings ratio than that of India should in the long-term drive gold demand in China ," reckons Stephan Schlatter, head of metals in Asia for UBS.

China 's domestic gold-mining production also rose strongly during the first nine months of this year, according to analysis by Surbiton Associates in Melbourne , Australia , released this week.

Reaching 191.5 tonnes of gold bullion, China 's output overtook the United States and was only just behind South Africa , the world No.1, where annual gold-mining production has now halved in the last decade.

Yesterday brought news that DRD Gold – South Africa 's fourth-largest producer – will suffer a 15% drop in gold output this quarter following an accident. Tuesday saw a one-day strike by almost 250,000 miners in South Africa in protest against what the National Union of Mineworkers calls "mining genocide".

Mining-related deaths now total 201 for this year so far, worse than 2006 and on track to equal 2005. Fatalities in South Africa 's mining sector have fallen by 56% as gold output has halved since 1996, but the industry was hoping to cut that number by a further 20% by 2013.

China is also suffering a wave of mining-related accidents, however, with up to 96 coal miners feared dead this morning after an explosion in the northern province of Shanxi .

The surge in Chinese gold production could also reverse sharply by 2013 according to a leading industry figure today.

"It's urgent for Chinese companies to develop gold mines overseas," said Ren Guangzhi, investment manager at Zijin Mining Group, owner of China 's biggest gold mine, in Shanghai .

Unless new deposits are found and developed soon, he believes China 's reserves – including gold-only mines producing 200 tonnes per year – could run out within six years.

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

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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