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Gold Hedge Against Credit Crisis Risks

Commodities / Gold & Silver Jul 16, 2008 - 08:17 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD BULLION gave back an overnight rally of 0.8% late-morning in London on Wednesday, recording an AM Fix of $974 per ounce as European stock markets tumbled for the seventh time in 11 sessions.

The FTSE index of UK blue-chips sank 1.4%, while crude oil held near $136 per barrel, down almost $10 from Tuesday's near-record high.


Base metal and soft commodity prices also fell further, while bond investors bought three-month US Treasury bills yielding just 1.34% annualized.

Today's US inflation data was expected to show a 4.5% increase in consumer prices from June '07.

After rising almost 30% in the first 6 months of this year, notes Bloomberg News, the Reuters/Jefferies CRB Index has fallen 2.8% so far in July, with zinc dropping one-third from its peak and copper losing 8% from its top of this spring.

But that doesn't yet mean Inflation's Killed by Recession .

" Gold typically does well in economic turbulence," says the Fortis Metals Monthly, "and central bankers seem united in their conviction that tough times lie ahead."

"Credit risk, and the risk of more banks defaulting, remains rife – which has been supporting gold and silver," notes Manqoba Madinane at Standard Bank in Johannesburg today.

Tuesday saw the Labor Dept. report the worst rate of wholesale US price inflation since 1981 at more than 9% year on year.

Federal Reserve chairman Ben Bernanke conceded "numerous difficulties" in the US economy.

Consumer prices in the 16-nation Eurozone rose 4.0% in the last 12 months, said the Eurostat agency early Wednesday.

Germany 's ZEW index of economic sentiment yesterday sank to an all-time low.

"Given forecasts of slowing global growth and terrible stock market performance from the emerging markets, we believe we may have witnessed the peak in this commodity cycle," reckons Merrill Lynch strategist Brian Belski in a note to clients sent Tuesday.

"A combination of deteriorating pricing power, a US Dollar that has found its footing against major currencies and rising interest rates for risky borrowers is providing significant macroeconomic headwind for materials."

The Dollar found something like a "footing" against the Euro today, knocking it one cent lower from Tuesday's new record levels.

But the US currency continued its five-session slide vs. the Japanese Yen, however, reaching a 7-week low beneath ¥104.

The rallying Yen – which last month broke away from being inversely correlated to the Nikkei stock index – today knocked Gold more than 2.2% off yesterday's new 25-year top for Japanese buyers, even as the Tokyo stock market held flat.

For French, German and Italian investors wanting to Buy Gold today the price moved above €612 per ounce, a level first reached in late January.

Meantime in the commodities sector, platinum futures followed the overnight slump in crude oil prices, falling to a 10-week low in Tokyo

The price of platinum – more than 50% of which goes to auto-makers for use in catalysts each year – "remains solidly supported by the risk of another supply crunch from South Africa ," according to analysis from Virtual Metals.

But "with each passing day we are reading about more car companies cutting back on production, airlines slashing flights and consumers driving less," notes Edward Meir at MF Global of the oil market.

"As the pace of demand destruction accelerates, it will be harder to ignore."

Belski at Merrill Lynch likewise advises going "underweight" mining and oil-related equities – Wall Street speak for selling stocks. And his opposite number at Morgan Stanley, Abhijit Chakrabortti, agrees that "the materials sector now recognizes the risk of sizeable demand destruction."

But Chakrabortti still advises investors to go "overweight" in Gold , calling it a far better "crisis hedge" than crude oil futures.

Today in the Gold Mining sector, a strike in protest over rising energy prices in South Africa halted production at mines owned by Gold Fields and Harmony – the world's fourth and fifth largest gold miners respectively.

It's too early to assess the impact on current production, said a Gold Fields spokesman to MiningMX.com.

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 2008

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.

Adrian Ash Archive

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