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Gold Surges vs. All Currencies as Oil Rises & Inflation Reports Loom; Europe Attacks Washington Over "Weak Dollar" Policy

Commodities / Gold & Silver Oct 15, 2007 - 09:05 AM GMT

By: Adrian_Ash

Commodities GOLD PRICES SURGED yet again early Monday, reaching new 27-year highs against the US Dollar and breaking through €530 for European buyers – a new 17-month high.


Gold Priced in British Pounds rose above £370 to come within £10 of the all-time record high set in May 2006. Gold also gained more than 0.5% from Friday's close against the strong commodity currencies of Australia and Canada .

"The lowering of the Fed funds rate...is putting more pressure on prices," said Alan Mandel, president of the eponymous AlanM Trading Co. in New York , to Bloomberg earlier.

"We're at historic highs and I don't see a red light in front of the Gold Price ."

By lunchtime in London , the price of physical gold for immediate delivery had gained more than 0.9% from Friday's closing level. The most-active Comex gold futures contract, due for delivery in Dec. '07, broke $760 – the highest level for the "front-month" contract since Jan. 1980.

Racing higher against the Japanese Yen, spot gold also gained 1.1% for Tokyo investors overnight. Gold Prices for Japanese buyers has now risen by more than one-fifth since the current rally began nine weeks ago.

Morgan Stanley raised its average Spot Gold forecast for 2008 to $800 per ounce, citing strong Asian demand and the weak US Dollar. "The potential for a weaker US Dollar, concerns about the credit crunch and the impressive rally so far have brought investors back to gold in ways not seen for years," agree analysts at UBS.

"In the case of safe haven buying," the Gold Market hasn't seen this level of interest in "decades," they add.

"We expect further waves of investment and speculation over the next 12 to 18 months."

Looking to the week ahead, Thursday marks the 20th anniversary of "Black Monday", the Oct. '87 plunge in world stock markets that erased 23% of the Dow Jones in one session.

"Markets are more sophisticated today, and risk is more dispersed," said one mutual fund manager to the newswires at the weekend, forgetting the near-10% slump in world equity prices seen only this summer when "quantitative trading" strategies compounded the panic caused by sharp losses on US home-loan derivatives.

Black Monday famously saw panic selling snowball thanks to computer-run "program trading" designed to mitigate risk.

Also on Thursday, US Treasury secretary Hank Paulson will chair a meeting of G7 finance ministers, where European leaders are expected to demand action on the damage caused to their export industries by the ever-falling Greenback.

"I'd really like to hear again Henry Paulson saying loud and clear that a strong Dollar is good for the American economy," joked French finance minister Christine Lagarde in an interview with Les Echos at the weekend.

Exports from the European Union to the United States sank by more than one-eighth between Jan. and Aug. compared with the same period in 2006, notes Andrew Busch at BMO Capital Markets. The US Dollar dropped 7% of its value against the Euro during that time.

Over on Wall Street this week, the US earnings season will pick up pace, with more than 80 constituents of the S&P500 index releasing their third-quarter results. "Expectations are low," says Reuters, noting that its own survey puts total S&P earnings growth at just 3.2%.

US retail stocks are now forecast to report a 7% drop in earnings against a 3% rise forecast in July, says the Financial Times . Financial stocks are expected to report a 6% fall versus a 9% rise forecast only 3 months ago.

Today, Monday, brings few economic figures. But the Eurozone, UK and United States all report their latest consumer price-inflation data on Tuesday and Wednesday. Analysts forecast higher CPI numbers across the board. But consumers are increasingly "losing patience with the official statistics," says John Clemmow at UBS in London .

"Look behind the official numbers and you can see that [genuine] inflation is back, and I am concerned that it is rapidly morphing into the kind of structural inflation that characterized the '70s." ( Is red hot inflation now baked in the crust? Read on here... )

Copper prices rose in Shanghai trade today, and lead prices hit a new record high in London . US crude oil futures also hit a new peak above $85 per barrel. Citigroup raised its forecast for average oil prices in 2008 by $10 per barrel.

European stock markets meantime crept higher, with the FTSE100 in London reaching a 7-year high, led by mining and energy shares.

The Nikkei in Tokyo had earlier finished the day just 0.1% better, while Japanese gold futures traded for delivery in Aug. '08 gained 1.4%, taking the most-active contract to new 22-year highs. Near-dated platinum futures went "limit up", hitting the maximum daily gains allowed.

In Shanghai , the major index of mainland Chinese stocks broke through the 6,000 level for the first time ever, while the Communist Party began its 17th Congress in Beijing .

The Shanghai Composite has now risen six-fold in the last two years.

On the currency markets, the Euro recovered Thursday's two-week high above $1.4238, capping the Gold Price in Euros at €533 per ounce, a gain of 2.3% from last week's start.

The Japanese Yen fell to a three-week low, worth ¥117.72 per Dollar, while the British Pound jumped to a two-session high of $2.0430 before slipping back as government data showed house-price inflation falling to 11.4% annualized in August, down from 12.4% in July.

While that rate of increase may sound more-than-bullish for UK real estate, the average time on market of a house-for-sale has risen to 85 days over the last month – a five-year record – according RightMove, a private consultancy. The number of unsold properties on estate agents' books rose to the highest level since 2004.

Spooked by the slump in US mortgage-backed securities (MBS) meantime, three of Wall Street's biggest banks are expected to announce today a new "bail out" fund that will buy high-risk MBS in the hope of avoiding a meltdown in the sector.

Estimated by the press – all quoting "sources close to the deal" – at between $75-100 billion, the fund will be known as the Master-Liquidity Enhancement Conduit, or "M-Lec" for short. Guaranteed by Citigroup, J.P.Morgan and Bank of America, it will issue its own short-term debt to buy subprime mortgage assets and deflect any "firesale" impact on open market prices.

"Banks made unwise business decisions, and now they're scrambling to save themselves," said Steve Persky, chief executive at Dalton Investments in Los Angeles , which has $1.2 billion under management.

Citigroup, a member of the M-Lec group and the world's second-largest bank by stock-market value, is expected to report a 60% drop in its earnings after warning of "trading and loan losses" last Thursday.

Today in Tokyo , Nomura Holdings – Japan 's largest investment securities firm – said it has lost ¥73 billion ($620m) on US mortgage loans. It's cutting 400 jobs in the United States , and now expects to report its first quarterly loss since 2003.

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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