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Gold Plunges Ahead of Fed Interest Rate Decision

Commodities / Gold & Silver Apr 30, 2008 - 08:29 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD BULLION continued to slide early Wednesday, avoiding the collapse forecast by many analysts after dropping through $875 per ounce but reaching a series of fresh 3-month lows as the US Dollar rallied against the Euro, crude oil and the value of world stock markets.

"The previous low [of April 1st] has been taken out and the technicals now quickly point to $850," says today's Gold Market note from Mitsui, the precious metals dealer.


"The pull back in prices will [however] be starting to get the interest of the physical players priced out of the market for so long."

Today's AM Fix in London saw the Gold Price set at $867 per ounce, its lowest Fix in more than 13 weeks.

Despite reports of strong physical Gold demand from jewelers across India and south-east Asia – and even as the US Dollar pushed the Euro towards a one-month low beneath $1.5530 on the currency markets – the Gold Price in Euros also slid, dropping through €561 per ounce.

That was the top of Gold 's previous surge ending May 2006. Today the price of gold for French, German and Italian investors reached its lowest Morning Fix since 20th Dec. '07 .

And for British investors looking to Buy Gold today, the metal traded down to its lowest level since 7th January, some 15% below its record highs of March 17th.

"I don't think it's short selling, I think its liquidation," says George Gero of RBC Capital Markets.

"You have lower open interest [in the futures market], you have lower closing prices and you have higher [physical] deliveries than usual. And you have a fearsome Wednesday coming up."

Today the Federal Reserve will announce its latest interest-rate decision at 14:15 EST. It's widely expected to make a "babystep" reduction of 0.25% before signaling – in its accompanying statement – an end to the rate-cutting campaign begun in August '07.

"The worst is over," claims a headline in the Financial Times today. "Belief grows that the credit crisis is abating."

But since the Fed's last 0.75% rate-cut in March, however, interbank lending rates have actually risen by 0.33% according to Bloomberg data.

Last night the biggest bank in America , Citigroup, announced a fresh $3 billion capital issue to add to the $40bn it's raised to defend its balance-sheet since Christmas.

"There's clearly a need for the Fed to do more,'' says Charles Lieberman, CIO at Advisors Capital Management in New Jersey and a former Fed economist.

"The underlying problem [remains that banks] are still nervous."

The current bounce in the Dollar – and the concomitant losses in gold – also ignores the US Treasury's outstanding $9 trillion deficit as well as the United States ' trade deficit of $235 billion for 2008 so far.

But "the sell-off in Gold can only partly be ascribed to the Dollar," says today's note from Standard Bank in Johannesburg , South Africa , "after it gained ground against major currencies such as the Euro.

"We perceive an undertone of nervousness [in gold] not entirely explained by Dollar strength, which perhaps triggered even more selling."

World stock markets also slipped this morning, ticking 0.5% lower ahead of the Fed's decision today. Government bond prices rose, meantime, pushing interest rates lower in the open market across Asia and Europe .

Base metals fell after a report from Moody's forecast lower global demand in the back-half of 2008. Food stuffs continued to rise, however, pushing corn towards its eighth monthly gain on the run.

Crude oil slid below $115 per barrel, taking its losses from Monday's new record top to more than 3.4% as the Forties pipeline came back online in the North Sea after this weekend's strike action.

Petroleum staff in Nigeria may return to work later today, bringing another 860,000 barrels per day back on-stream.

Meantime in the Gold Market , new mining supplies from Zimbabwe – formerly the world No.18 in terms of annual output – fell by 61% last month from February, reaching just 0.3 tonnes.

China 's gold output, in contrast, grew by almost 8% during the first three months of the year according to the Interfax agency, reaching 60.6 tonnes.

Overtaking South Africa as the world No.1 in 2007, however, China has in fact seen its output hold steady since 2005.

It's the collapse in US, Canadian, Australian and particularly South African output that has moved China into pole position as the world's biggest gold mining nation.

Today Gold Fields – the fourth largest gold mining company in the world – said four workers have died this week in separate incidents at its Driefontein and South Deep gold mines.

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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