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Gold Market "Illiquid" as Zero Interest Rates Loom

Commodities / Gold & Silver Dec 03, 2008 - 11:34 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD for physical delivery slipped back against the Dollar, Euro and Yen early Wednesday in London, but recovered two-thirds of this week's 3.5% drop for UK investors as the Pound tumbled again on the foreign exchanges.

On the stock market, Wall Street's strong overnight finish faded in Asia and left European bourses almost 1.5% lower by lunchtime.

Crude oil ticked 50¢ higher from yesterday's new 3-year lows, but base metals sold off once more.

Government bond prices also slipped, forcing a sharp rally in Treasury yields. But 10-year US bond yields remained well below 3.0% – a previously unseen low.

"With the NBER officially confirming [on Tuesday] that the US economy has been in recession for 12 months already, the only remaining question is: When we will see the bottom?" asks Walter de Wet, senior precious metals analyst at Standard Bank in Johannesburg.

"The markets have been pricing in this recession for almost four months already. However, have they priced in a deep enough recession?"

Falling for the fourth time running – the longest stretch of falling prices since 1997 – the monthly average Gold Price ended Nov. at $760 an ounce, its lowest level since Oct. 2007.

The near-7% jump in Gold Prices seen on Fri 21 Nov. came as hedge funds and other large speculators faced a "short squeeze", forcing them to slash their bearish bets on the futures markets and cutting the number of "short" contracts they held by more than one third.

New data for the week-ending Tues 25 Nov. – released yesterday – also showed speculative investors trading Gold Futures & options at the Comex in New York adding one new bullish bet for every five long contracts they had outstanding.

But the total number of gold contracts on the US derivatives market continued to shrink, however, falling by almost 13% from the week before to just one-half the size of January's all-time record.

"Despite the dip in Gold ," reports precious metals dealer Mitsui this morning, "it seems physical players are not as enthusiastic as you would imagine.

"Support for Gold now lies at the $750 level, and it seems we may be setting up for a test of this area shortly...[while] continued pressure on the base metals complex may be weighing down on Silver, and we don't expect this to change in the near future."

Today's global economic data – released ahead of private-sector US employment figures for Nov. – continued the flood of bad and bearish news.

GDP growth in Australia fell to 1.9% in the third quarter from 2.7% during the 3 months before. New orders, employment and output levels for manufacturers in Europe accelerated their plunge last month, the PMI index said. Retail sales in the 15-nation currency zone shrank 2.1% in Oct., while here in the UK, shop prices continued falling in November as retailers began their New Year sales two months early.

"This is a big week for news," Afshin Nabavi at MKS Finance, part of the Swiss refining giant, to Bloomberg this morning, "and a lot of people will be on the sidelines ahead of that.

"This is going to be a very illiquid market."

Friday brings official US jobless numbers, plus consumer credit growth for Oct. – expected to have shrunk to $1.5 billion from almost $7bn in Sept.

But first will come Thursday's interest-rate decisions from both the European Central Bank (ECB) and Bank of England. And "if zero is the floor," says former BoE policy-maker Willem Buiter in the Financial Times , "there is no reason not to go there immediately.

"The ECB is behind the curve and in denial about the absence of a liquidity crunch in the Euro area."

Today the Euro slipped back towards $1.26 to the Dollar, and for "as long as the Dollar continues to strengthen against the Euro, gold will continue to fall," reckons Liran Kapeluto at Finotec Trading in London.

"We don't see any reason to Buy Gold . Inflation is going down too."

The Gold Price in Euros rose today, however, up at €613 per ounce to stand more than 1% above Oct.'s record monthly average.

The Gold Price in Sterling rose to £528.50 per ounce, more than 6% above Nov.'s record average and almost twice the average of autumn 2005.

Meantime in the Gold Mining sector, "Big projects that have already been discovered and that were going into production are now being shut down," notes Graham Birch, manager of the $8bn BlackRock Gold & General Fund.

"Majors have the deposits and they are not using them. Why do they need to explore for new ones?"

Freeport-McMoRan Copper & Gold Inc. – which reported a 30% drop in third-quarter earnings – is more than halving its capital expenditure to $1.1bn for 2009, while suspending the dividend.

Gold output is expected to remain at current levels.

New Zealand's largest gold miner, Oceana Gold Corp, is meantime mothballing its gold-copper project at Didipio, northern Philippines, owing to the "deterioration of global economic conditions" reports the National Business Review.

"In these uncertain times, we are focused on maximizing revenue and reducing expenditures," says Stephen Orr, the CEO.

World No.1 Gold Miner , Barrick Mining said at a Toronto conference on Tuesday that it's "looking at just about everything in the [mergers & acquisitions] marketplace", but tight credit markets and falling prices are making it cautious.

Problems at Barrick's Pascua Lama project – "which straddles the border of Argentina and Chile and has been held up in a tax dispute," according to Mineweb – are slowly being resolved, but "we're still not there yet," the company said.

By Adrian Ash

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 , 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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