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Gold Rises on Credit Crisis as UK Banks Slump

Commodities / Gold & Silver Jun 02, 2008 - 08:59 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES jumped 1.2% higher after an early dip on Monday, gaining as European stock markets fell sharply.

The Gold Price then fell back to trade near to last week's close as the New York opening drew near.

US stock futures pointed down, while crude oil prices slipped 1.3% to fall below $126 per barrel.


The Dollar held flat against the Euro and Yen. Financial shares pulled London 's FTSE100 index 1% lower – and government bond prices moved higher – after a profits warnings from the UK 's eighth largest bank.

Together with a slowdown reported in UK money supply growth, that news knocked the Pound Sterling to a one-week low of $1.9605 on the forex market.

The Gold Price in Sterling jumped to come within 50p of a three-session high at £455.50 per ounce.

"The week ahead is a busy one in terms of data releases," notes Walter de Wet in today's precious metals note for Standard Bank in Johannesburg .

"Most notably," he points to Eurozone Producer Price inflation and GDP figures on Tuesday, followed by ECB and Bank of England interest rate decisions on Thursday.

Friday brings non-farm US payroll data – a key mover for the US Dollar now the futures market forecasts a reversal of Federal Reserve policy and a 0.25% increase in the Fed funds rate by the end of 2008.

"These data releases could see careful and volatile trading," says de Wet. " Gold saw good buying support in Europe on Friday after inflation fears drove the price higher."

Bloomberg's latest weekly survey of gold professionals, however, found one-in-two forecasting a further fall between now and next Friday.

Last week Gold Prices dropped more than 4% as oil prices sank 3.7%. But the metal rose as oil slipped today, after Hurricane Arthur – the first tropical storm of 2008's hurricane season – bypassed Mexico 's huge Cantarell oil field overnight, where Pemex pumps 1.07 million barrels per day.

"The storm went by without any major incident or disruption," notes Tetsu Emori, a fund manager at Astmax in Tokyo , "so that's cleared the market of upside risks.

"The other bearish factor is the investigation [into speculation] by the United States , which could reduce liquidity because there's concern among investors."

Following last week's Senate Committee blaming speculation in food and energy markets for the recent record high prices, hedge funds and other large speculators cut their long positions in crude oil by 12% last week according to the latest Commitment of Traders data.

Open interest in Gold Market futures and options shrank by 5% overall, as private investors increased their bets on lower prices by one-third.

Professional funds and traders, in contrast, grew their bullish bets by 2%.

In Tokyo today, Japanese Gold Prices rose back above ¥3,000 per gram at the Tocom futures exchange.

The Nikkei stock index also rose 0.7%, hitting a five-month high as export and banking stocks rose on higher earnings.

"There's no question that anxiety about the credit crunch is easing," reckons one Tokyo strategist.

"People are growing a bit more willing to take risks, and we're also seeing some cash coming in from the Japanese government bond market."

Here in London this morning, however, Bradford & Bingley – the UK's largest "buy-to-let" lender to private real estate investors – issued a profits warning and said US private equity firm Texas Pacific Group will buy almost a quarter of its shares.

A planned £300 million ($589m) rights issue is also being scaled back – and repriced – after B&B's stock closed last week just 6p above the proposed offer price.

Today's news sent London 's financial sector sharply lower, with Bradford & Bingley opening the week more than 25% lower.

Meantime in the gold-mining sector, a report from Surbiton Associates says Australian gold output fell 12% in the first three months of 2008, hitting its lowest level in 19 years.

But "[the drops are] nowhere near as bad as they seem," added Surbiton director, Dr. Sandra Close, who pointed to temporary mine closures and heavy rains.

"The primary cause of the sharp drop in output was the lower average grade of ore treated [however]. I suspect some operators are taking every advantage of the high Gold Price to reduce their head grade.

"This allows them to recover more gold over the life of the mine while still maintaining their profitability."

Over in South Africa – where total output per year has halved over the last decade – an unofficial strike halted production last week at the Blyvooruitzicht mine belonging to DRDGold.

The national power utility Eskom, which closed all South African mining production in January by suspending energy supplies, admitted this weekend to facing a "huge challenge" in securing enough coal at "affordable prices" to fire its power stations.

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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