Gold Rises on "Safe Haven" Bid; Seasonal Surge Collides with Producer Buy-Back

By: Adrian_Ash

SPOT GOLD PRICES dipped overnight from Thursday's 16-month Dollar highs, before rising again in London to break new ground for this bull run above $698 per ounce.

"Gold is now overbought technically," reckons Phil Smith for Reuters India, "breaking through some important technical resistance levels.

"But frankly," he adds, "support and resistance levels do not seem to have counted for much during the recent price action."

The Gold Price in Pounds Sterling broke a new four-month high above £345 per ounce. For Eurozone investors, the price touched €510.

"The trend for gold is clearly very strong," adds Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo , "but I'm worried about the speed. We could see some more profit-taking before testing $700."

"The subprime problems have shaken stock, currency and credit markets...it seems investors are treating gold as a last resort of investment. We are also seeing strong inflows into exchange-traded gold funds."

The gold held in trust by the StreetTracks GLD fund has now grown to a record 542.35 tonnes, a gain of 5% from this time last week. Putting in its highest start since mid-May 2006 today, the Spot Gold Market has now risen in all but five of the last 14 sessions, gaining 6.7% from the low hit as world equity markets sank in August.

As investors have began to push gold sharply higher, the S&P equity index in New York has risen less than 5.5% since the middle of last month. Ten-year US Treasury bond prices have advanced by 1.8%.

"There's been a lot of talk about gold revamping its safe-haven status," said David Meger, metals analyst at Alaron Trading, to the Chicago Tribune overnight. "With the concerns about the economy and the volatility that we've seen in equity markets...funds [are] drawing themselves toward gold as a safe haven."

As Spot Gold Prices leapt 2% on Thursday, crude oil prices also shot higher, hitting $77.43 per barrel on the US benchmark – less than $1.50 off its all-time high of last month – as political tensions in the oil complex rose.

The US embassy in Nigeria , the world's eighth-largest oil producer, warned of possible terrorist attacks in the West African nation. In the Middle East , Syrian air defenses fired on Israeli jets apparently violating Syrian airspace. Technically, the two countries remain in a state of war after peace talks broke down in 2000.

And in Northern Europe , Norway and the UK saw their airspace violated by eight Russian bombers flying on a long-range patrol. The RAF scrambled Tornado jets to intercept the Tupolev Bears, the third such "Cold War" incident for the British airforce in 2007 so far.

September's sharp growth in the "safe haven" bid for gold, meantime, comes just as foreign holders of American debt have begun selling their US Treasury bonds. The Daily Telegraph in London says the bond selling – worth more than $48 billion over the five weeks ending Aug. 31st – "raises concerns China is quietly withdrawing its funds from the United States , leaving the Dollar increasingly vulnerable."

What's more, the new upsurge in the Spot Gold Market also coincides with the start of India 's busiest wedding and festival season. Experts from the World Gold Council forecast that Indian gold sales this autumn could top the record sales of 2006 by up to one half. The impact of Indian "off-take" from the world market in physical gold is set to run until the New Year.

"Seasonally, this is when gold comes alive," as David Meger tells the Chicago Tribune .

"From Asian farmers converting their harvest into a gold stash to Italian jewelers returning from vacations, the physical demand for gold, as opposed to gold futures and other gold-linked paper investments, tends to pick up starting in late summer."

Gold sales in the Middle East 's richest cities are rocketing too, and they've already risen by one quarter in Turkey – the world's fourth hungriest gold market – from the same period last year. In China , private gold buying jumped by one-third between April and June.

Gold mining production, on the other hand, just cannot keep pace. South Africa , the world's largest producer, saw its gold output slide 7.5% between April and June according to the Chamber of Mines.

Annual production in South Africa has halved in the last decade. Despite large and growing investment in new exploration worldwide, the world's largest gold mine – Yanacocha in Peru – was discovered more than two decades ago. According to the highly respected Philip Klapwijk of the GFMS consultancy, geologists now worry that the next big "elephant" find simply isn't out there to be found.

Meantime in London , "the market is buzzing," says Jessica Cross, head of the Virtual Metals group that produces Mitsui's quarterly Hedge Book analysis.

Speaking on South Africa's Classic Business radio show last night, she noted the rapid growth in exchange-traded gold held in trust – up 27 tonnes this week already – "together with rumors of a big producer buy-back we're trying to get to the bottom of at the moment."

Also known as "de-hedging", buy-backs by gold mining companies who'd previously sold some of their future production using forwards contracts reached a record peak between April and June this year. The previous peak in gold miner de-hedging came as Spot Gold Prices raced to a 25-year record above $725 per ounce in May 2006.

Now the latest de-hedging rumors, coupled with surging demand from Western investors and Indian farmers alike, look set to keep gold well-supported as the weekly close draws near today – the highest weekly close since that top of May last year.

By Adrian Ash
BullionVault.com

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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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