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Gold Corrects Lower Following Oil Price Plunge Below $130

Commodities / Gold & Silver Jul 23, 2008 - 06:21 AM GMT

By: Mark_OByrne

Commodities Gold finished trading in New York yesterday at $948.20, down $15.20 and silver was down 44 cents to 17.93. Gold continued to fall in Asia and in early European trading it is down by nearly 1.3%.

Gold was due a correction after its recent surge in price and remains up some 6% in the last month (from $882 to  $935) unlike oil and the majority of stock markets (which are down by similar amounts). Gold's recent outperformance may have led to a bout of profit taking and further consolidation is likely prior to challenging the March highs of $1030 per ounce in the coming weeks.

Yesterday, gold showed considerable strength in early European trading but subsequently fell sharply due to another steep fall in oil prices (down by some 3%), a strengthening dollar (up nearly 1%) and increasing risk appetite on the rallying  stock market. And this despite deteriorating financial data as seen in the fact that U.S. home prices fell a record 4.8 percent in May from the same month last year and Wachovia and other U.S. banks posted dismal results. Banks are suffering as the nation's housing crisis deepens, making it harder for consumers, businesses and homebuilders to make the repayments on their loans.

While oil remains an important factor in influencing the gold market, we remain confident that there will be a gradual decoupling between oil and gold in the coming months. Already this month gold is up some 5.2%, while oil is down some 6.4%. Gold will continue to outperform oil as oil is a commodity that is far more subject to demand destruction in the face of a sharply deteriorating global economy than gold. Gold has both commodity and currency credentials and it gold's finite currency and safe haven credentials that will assume increasing importance in the coming weeks due to  increasing macroeconomic and systemic risk.

Paulson and Plosser Verbally Manipulate Dollar off Dangerous Record Lows
The dollar recovered from near record lows against the euro yesterday after more jawboning from Philadelphia Fed President Charles Plosser and Treasury Secretary Henry Paulson. The continuing attempt to verbally manipulate the dollar higher from near record lows is destined to fail as actions speak louder than words. Talking the talk regarding a strong dollar being “very important” to U.S. national interests is all well and good but actions speaks louder than words and this is more pretence monetary hawkishness.

The only action likely to stop the dollar from falling to new record lows against most major currencies and stopping an even sharper depreciation of the dollar in global currency markets is for the Federal Reserve Chairman, Bernanke to begin rising interest rates and for the pork barrel and massive military expenditure of the recent profligate ‘Bush years' to be consigned to the dustbin of history.

Negative real interest rates will result in the dollar continuing to depreciate, possibly sharply, in the coming months causing even greater inflation and no amount of soothing words and political jawboning will be able to stop this.

U.S. Bankruptcy To Become A Foregone Conclusion?
Paulson, Plosser, Bernanke and Bush would do well to study the report published by the Federal Reserve Bank of St. Louis in July/August 2006, which states that "Unless the United States moves quickly to fundamentally change and restrain its fiscal behavior, its bankruptcy will become a foregone conclusion."

The Federal Reserve Bank Report  continues "Given the reluctance of our politicians to raise taxes, cut benefits, or even limit the growth in benefits, the most likely scenario is that the government will start printing money to pay its bills. This could arise in the context of the Federal Reserve “being forced” to buy Treasury bills and bonds to reduce interest rates. Specifically, once the financial markets begin to understand the depth and extent of the country's financial insolvency, they will start worrying about inflation and about being paid back in watered-down dollars. This concern will lead them to start dumping their holdings of U.S. Treasuries. In so doing, they'll drive up interest rates, which will lead the Fed to print money to buy up those bonds. The consequence will be more money creation—exactly what the bond traders will have come to fear. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation ."

Today's Data and Influences
The data/events calendar picks up today with the Federal Reserve's Beige Book due for release later.

Most of the focus in the early part of the day, however, will be on the UK, with the minutes of the last BoE policy meeting due for release as well as the CBI Industrial Trends survey for July. The central bank left its base interest rate at 5% on the 10th of July. The minutes are due to be published at 9:30 a.m. today. This morning, the market is expecting an 8-1 vote in favour of keeping rates on hold, with David Blanchflower the only member calling for a cut.

Gold and Silver
Gold is trading at $934.20/934.80 per ounce (1130 GMT).
Silver is trading at $17.45/17.50 per ounce (1130 GMT).


Platinum is trading at $1745/1755 per ounce (1130 GMT).
Palladium is trading at $389/395 per ounce (1130  GMT).

By Mark O'Byrne, Executive Director

Gold Investments
63 Fitzwilliam Square
Dublin 2
Ph +353 1 6325010
Fax  +353 1 6619664
Gold and Silver Investments Limited
No. 1 Cornhill
United Kingdom
Ph +44 (0) 207 0604653
Fax +44 (0) 207 8770708

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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