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Gold Bounces as Stock Markets Fall on Horrific Data

Commodities / Gold & Silver May 13, 2008 - 09:01 AM GMT

By: Adrian_Ash

Commodities

SPOT GOLD PRICES fell to a three-session low early Tuesday, finally bouncing higher from $876 per ounce as European equities slipped alongside crude oil prices and government bonds.

Only base metals bucked the trend as the Dollar ticked higher on the currency markets.


By midday in London , spot Gold for immediate delivery of physical metal stood almost 1% below Tuesday's US close.

"Signs that the US Dollar has bottomed have pressurized Gold Prices in recent weeks," says Natixis, the French investment bank, in its May report.

Identifying a "selective bull market" in precious metals, Natixis believes "the Investment Case for Gold will remain strong throughout the rest of this year and, potentially, into 2009.

"However, this may not lead to new highs in the Gold Market ," it says, adding that "we may have already seen the peak for the year, when prices briefly exceeded $1,000 per ounce."

For British investors looking to Buy Gold today the price bounced around £450 per ounce after a double-whammy of rotten news for the UK economy.

Consumer price inflation rose to the Bank of England's upper-limit of 3.0% annually in April, said the official data agency this morning – "a pretty horrific headline number," as one analyst put it to the BBC.

But retail sales meantime sank 1.5%, while house prices – the key driver of Britain 's credit & business cycle – fell across 82% of the country according to the latest reports from professional surveyors.

"The real issue is the collapse in the number of housing transactions," says Ian Perry, spokesman for the Royal Institution of Chartered Surveyors (Rics).

"This has very real implications, not just for the property industry but also the High Street and the wider economy."

In the United States – where Tuesday's session brings the latest readings of import prices, retail sales and consumer confidence – "the core price measures are rising somewhat faster than I would prefer," said Sandra Pianalto, head of the Cleveland Federal Reserve Bank in a speech today.

"Inflation presents a key risk to my outlook."

Yet somehow – and despite voting to slash US interest rates some 2% below the current growth in US consumer prices – Pianalto also believes that "the Federal Reserve's policy strategy remains compatible with a low and stable inflation rate."

Last week average US gasoline prices reached a record $3.72 per gallon. Now the Petroleum Equipment Institute – based in Tulsa , Oklahoma – says that 8,500 of the United States ' 170,000 gas stations will need to fit new pumps to display prices above $4.00 per gallon.

"Installed when gas was less than $1 a gallon, their dials top out at $3.999," reports the Associated Press.

On Wall Street, a straw poll of big US investment managers shows today that "two investors who run bond funds are worried about higher inflation [but] two equity investors aren't as concerned," notes Karen Dolan at MorningStar.com.

Contrasting recent comments from Bob Rodriguez of FPA Capital and Bill Gross of Pimco with analysis from Bill Miller (Legg Mason) and Tom Marsico (Marsico Capital Management), Dolan concludes that "the differences in opinion may be somewhat reflective of the different lenses with which these managers view the world.

"Any threat of inflation is worrisome for bond managers because it drives down the prices of the fixed-rate bonds they own."

For equity fund managers, on the other hand, "we don't like inflation – it's bad for our country and our civilization," as Charlie Munger – right hand man to legendary value-investor Warren Buffett – said at the Berkshire Hathaway annual meeting last week.

"[But] we will make more money when there is inflation."

Inflation in raw energy costs took a breather on Tuesday, pulling the price of crude oil lower for the second session running after the International Energy Agency (IEA) cut its forecast for world oil usage in 2008 by 0.4%.

"The IEA's report again confirms the global extent of this [economic] slowdown and may be bearish [for oil] in the short-term," reckons Christopher Bellew at Bache Commodities in London .

Looking at the Eurozone, "inflation will decelerate further in coming months," says Natixis economist Sylvain Broyer; "[and] activity will be less resilient in the second quarter of '08."

But that other key mover of the Gold Market since last summer – the banking panic that sparked a Flight into Physical Gold by anxious investors and drove prices from $650 to $1,032 per ounce – may make a sudden return in the next month, believes Meyrick Chapman, an analyst at UBS.

Reviewing the key events of the global credit crisis to date, Chapman notes

the collapse of Northern Rock on Sept. 14, the joint central-bank action of Dec. 12, and then the bail-out of Bear Stearns – the fifth largest financial institution in the United States – on March 14.

All came within a week of quarterly settlement dates for currency and interest-rate contracts traded at the International Monetary Market (IMM), a major focus for interbank trading.

"We are expecting to see a gradual increase in risk aversion coupled with wider spreads and rising volatility," says Chapman in his new strategy report for UBS in London .

Citing June 18th as the next potential flash-point, "we probably won't see the same disruption as we saw in March," the report goes on, because of the central bank action seen in the meantime.

"But we will see some reversal" of the recent easing in monetary pressures.

Any return of the banking panic witnessed in Sept., Dec. and March may well spur a fresh Flight into Physical Gold by anxious investors.

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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