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Gold Surges as Governments Start Running Out of Ideas

Commodities / Gold & Silver Dec 15, 2008 - 10:49 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE OF GOLD BULLION came within $1 of a new two-month high early Monday in London, holding onto last week's 9% jump and recording its best Morning Gold Fix since Oct. 16th for US investors.

Crude oil and the Tokyo Nikkei index both jumped more than 5%, but European stock markets gave back their opening gains by lunchtime.


German bund and UK gilt yields fell as prices rose on a raft of poor data.

The Gold Price in Sterling recorded its best-ever AM Fix at £551.23 an ounce.

"Precious metals are benefiting from the much weaker Dollar as we head into year-end," reckons Walter de Wet at Standard Bank in Johannesburg, but "volumes are low and prices volatile."

For gold investors, "Primary support is at $810, with secondary support at $800 and $777," he believes.

"Resistance is at $832, $841 and $862."

Monday morning saw the European single currency touch a two-month high near $1.3500, capping the Gold Price in Euros below €615 an ounce.

The Dollar bounced against the Japanese Yen, however, rising from a new 13-year low beneath ¥90 after Tokyo – still paying nothing to cash savers in a bid to revive its economy after two decades of stagnation – reported the sharpest collapse in manufacturing sentiment since the late 1970s.

China's industrial output growth slowed to 5.4% year-on-year in November, Beijing said this morning, the slowest rate in 9 years.

Twenty-six economists polled by Reuters averaged a forecast of 7.1% growth instead.

Looking ahead to Wednesday's interest-rate vote by the Federal Reserve in Washington, more than two-thirds of futures bets expects a 0.75% cut to rates of just 0.25%.

Data from the New York Federal Reserve, however, shows that in the Fed funds rate already stands below 0.15% in the open market as the central bank floods the system with money.

The Fed continues to refuse a Freedom of Information request by Bloomberg News asking it to name the recipients of over $2 trillion in emergency loans funded by US taxpayer.

A report in the Wall Street Journal said on Saturday that president-elect Barack Obama will spend $1 trillion on trying to stimulate the economy over his first two years in office.

"If it looks like Bernanke and Paulson are making all their policy moves on the fly," writes fund manager and accredited-investor advisor John Mauldin in his Thoughts from the Frontline , "it is because that is exactly what they are doing – as would any person in their respective offices.

"There is no playbook with a set of standard policies and procedures that can be used in case of a credit crisis."

Across the Atlantic in Europe this morning, world-leading banks including HSBC, Santander and BNP Paribas admitted to investing in the "Ponzi Scheme" hedge fund run by former Nasdaq chief Bernard Madoff.

Holding $17 billion in assets but already guessing losses to be "at least approximately $50bn", Madoff told an FBI agent last Thursday there was "no innocent explanation".

Now "broke...insolvent," his fund – popular with fund-of-hedge-fund clients – "paid investors with money that wasn't there," Madoff confessed.

"You still have a massive paranoia in the marketplace and you've got that safety-at-any-cost mentality," says Jay Mueller, manager of $3 billion in bonds at Wells Fargo in Milwaukee.

Pointing to the zero-to-negative returns offered by government bonds, "People are not buying Treasury bills because they think the yields are attractive," he added to Bloomberg. "They are buying them because they are afraid to put money anywhere else."

Despite the collapse of official US rates and government yields, however, the interest charged to corporate borrowers has leapt in the debt markets the newswire notes.

The yield premium for corporate borrowers has risen from 2.96% above Treasuries in January to 8.85% according to Merrill Lynch data.

"We have the Fed interest rate decision this week, which should be the last big event of the year," says Afshin Nabavi, chief precious metals trader at MKS Finance in Geneva, speaking to Reuters.

"Everyone is banking on a lower interest rate in the United States. If the Dollar continues to lose value, of course it will benefit Gold ."

Meantime in the Gold Mining sector today, Australia's official Bureau of Agricultural & Resource Economics forecast a 3% drop in global gold output for 2008, but pointed to a slight recovery for 2009.

Gold mine output peaked worldwide in 2003, back when the price of gold stood at one-half of today's levels against the major world currencies.

World No.1 Barrick Mining today resumed operations at its North Mara project in Tanzania following an attack by 200 or more local villagers – variously demanding gold, sand, better environmental standards or fewer beatings from the mine's security staff, depending on which press reports you read – closed the mine Friday.

Back in New York, meantime, latest data on US derivatives showed late Friday that the total number of contracts outstanding in Gold Futures and options has now shrunk by one-half from the record top of January.

Hedge funds and other "large speculators" have closed out nearly two-in-every-three positions from mid-March – back when the Dollar Gold Price topped $1,000 an ounce – as investment banks shut down their prime-brokerage lines of credit.

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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