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Gold Holds Ahead of US Interest Rate Decision

Commodities / Gold & Silver Jun 23, 2008 - 09:06 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES gave back an early 0.6% rally in London on Monday, trading just shy of last week's close at $902 per ounce as crude oil bounced and European equities held flat.

The world's biggest investment banks, meantime, issued a series of notes accusing each other of ever greater write-downs for the April-June quarter.


"I think it's cautious trading in Gold ," said a Singapore analyst to Reuters this morning. "I think everyone is focusing on this week's Fed meeting."

"With no US economic data due to be released today," agrees Standard Bank in Johannesburg, "precious metal investment sentiment could remain subdued as investors take cue from currency market developments ahead of the Fed rate decision on Wednesday."

Tuesday will see the release of two separate US house price reports, with new home sales data to follow on Wednesday, just before the Federal Reserve announces its latest decision on Dollar interest rates.

The Gold Price has risen 38% since the Fed began slashing US interest rates in Aug. '07.

Gold topped out at $1,032 per ounce just as the central bank stepped in to rescue Bear Stearns in mid-March. The price then fell back as Fed officials hinted they might stop cutting rates – or even raise them – in a series of " Strong Dollar " speeches.

But with Wall Street economists forecasting a 16% drop in US house prices in the year to May, a new report launched today by the Joint Center for Housing Studies at Harvard University says residential real estate remains hugely over-valued.

Returning to the level of affordability seen before the subprime bubble began at the start of this decade "would take some combination of large price declines, interest rate reductions, rent deflation and unprecedented real income growth."

" US housing prices are collapsing," says Matthew Johnson, chief economist for ICAP – the world's largest broking group – in Sydney , Australia . "So I don't think the Fed can lift rates."

"We don't see a rate hike in the United States ," agrees Masataka Horii, co-manager of the $52bn Kokusai Global Sovereign Open in Tokyo , the world's second largest bond fund.

"But the bond market has priced one in, temporarily helping the Dollar."

Early Monday the Dollar briefly pushed the Euro back below $1.55 – down from an all-time high of $1.60 two months ago – after the Ifo Institute's survey of German business sentiment fell faster than expected to a 36-month low.

The European Central Bank (ECB) is still widely expected to raise its interest rates in July, however, after a member of its governing council today called inflation in the 16-nation Eurozone "alarming".

Today the chief executives of three large European corporations – electronics giant Siemens, sporting goods manufacturer Adidas, and Austrian-based energy retailer OMV – warned in the Financial Times that higher interest rates would only slow growth further.

" Gold and silver broke out of their long-term congestion patterns last week," says today's note from Mitsui, the precious metals dealer, "but neither managed to rally through June's previous highs.

"Gold is capped at $908.50 and silver at $17.70. The Euro has moved lower overnight and once again stalled Gold 's progress, but there is good support from the oil price, which is higher again."

On Sunday the oil minister of Saudi Arabia – the world's largest crude producer – pledged an extra 200,000 barrels of daily output. But Ali al-Naimi's announcement was then trumped this morning by news of fresh violence against oil facilities in Nigeria .

The world's eighth largest oil producer, Nigeria has now seen its daily output slide to a 25-year low as a result of militant attacks.

Last week the UK energy giant Shell declared was forced to suspend operations at its 225,000 barrels-per-day offshore field at Bonga , Nigeria , following a series of attacks.

Crude oil prices today rose 0.8% to $136.50 per barrel. Base metals also rose, but soft commodities – led by wheat – fell back on forecasts of warm, dry weather to follow the recent floods in America 's mid-west.

Meantime in the financial markets, analysts at Bank of America today warned of further write-downs at competitors Merrill Lynch ($3.5 billion) and UBS ($7bn).

Bank of America itself may be forced to follow the lead of US peers Citigroup and Wachovia and cut the dividend it pays to stockholders, says a note at MotleyFool – now running at 8.6% of the current share price.

UBS in turn warned today of a further $8.7 billion in asset write-downs at Citigroup, adding to the $42bn already announced by the Western world's largest bank since April.

Swiss giant UBS has itself written down $37.4bn of its assets since the global banking crisis began last summer – and in a separate note from its domestic competitor Credit Suisse today, an analyst warned that an on-going investigation into possible tax evasion by its wealth management division could "in a worst case scenario" result in UBS losing its banking license.

That would "have adverse effects on the global private banking franchise," says the Credit Suisse analyst.

With this squabbling failing to mask the ongoing destruction of wealth hitting customers of the world's biggest financial firms, "for the first time in my career, I [have seen] concern about the location of one's assets," says Robert Balentine, head of investment management at Wilmington Trust in the US, in an interview with Reuters.

"We've seen tangible evidence of very wealthy clients shifting assets out of brokerage firms in great numbers."

"If UBS can't manage its own capital," as a financial consultant in Verona , Italy adds, "then what the hell are they going to do with mine?"

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.

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