Gold Safe-haven Demand as Fed Credibility on the Line

By: Mark_OByrne

Gold surged to $928.50 in New York on Friday and was up $16.20 and silver closed at $17.62, up 50 cents.

While the dollar has strengthened somewhat, oil has again rallied sharply to new record highs ( up 2.4% to over $143.60 per barrel <Light Sweet Crude Oil Future - Combined - AUG08> ) and this should result in gold remaining well bid at these levels. Geopolitical risk and continuing tensions in the Middle East and between the U.S. and Iran appear to be part of the driving force behind new record highs and this has led to gold being firm.

After Thursday's largest one day move since 1985, gold followed through on Friday and has continued to rise in Asia and early European trading. In unprecedented trading, gold has rallied from $873 per ounce in the moments after the Federal Reserve decision to keep rates on hold ( June 25th ) to over $935 this morning –  over $60 and more than 7% in less than 3 days.

It looks increasingly like large segments of the market are questioning the Federal Reserve's recent decision and there are increasing concerns that the Federal Reserve's very credibility is on the line. Markets participants seem to be realizing that the Federal Reserve is impotent in the face of surging oil prices and inflation and a property crash and deteriorating credit crisis. Whether it increases rates or decreases them in the short term is not that important due to the magnitude of the challenges facing the U.S. and global economy.

Safe haven demand for gold will increase again in the coming months leading to markedly higher prices well above $1,000 as this financial and economic crisis continues to unfold. This is especially the case due to the terrible performance of the majority of equity markets in recent months. World financial markets have just suffered their worst six months trading in 22 years. Falling property prices, increasingly constrained credit conditions, and resulting worries about the health of global financial institutions all conspired with soaring oil prices to make it a miserable first half for investors round the world.

Silver has also surged by some 7% ( $16.60 to over $17.70) in 3 days and the news regarding a nationwide mining strike in Peru, the world's largest silver producer, is likely to mean silver remains well bid in the coming trading sessions.

Today's Data and Influences
This week should provide significant short term direction for currency and precious metal markets as there are many key data readings are due for release. Thursday sees both the ECB interest rate announcement and the US non-farm payrolls (owing to Friday being the US Independence day holiday). Non-farm payroll for June are forecast to show a further fall of 60,000 as slowing activity weighs on the labour market. This week also sees Chicago PMI, US Manufacturing PMI, and Euro-zone retail sales.

Silver
Silver is trading at $17.62/17.67 per ounce (1230 GMT).

PGMs
Platinum is trading at $2060/2066 per ounce (1230 GMT).
Palladium is trading at $466/470 per ounce (1230 GMT). 

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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