Tuesday, July 13, 2010

London Gold Market Report


Forex Special


Gold Jumps with Silver & Stocks as Chinese Agency Downgrades Western Debt, Central Banks Switch Out of Dollars

THE PRICE OF GOLD rose on Tuesday morning in London trade, recovering all of Monday's 2.1% drop as new US trade data drove the Dollar lower, and world stock markets extended their week-long rise.

Gold priced in Euros also gained, hitting one-week highs above €31,000 per kilo and reversing an earlier drop after the single currency shrugged off a downgrade to Portugal's debt rating by the Moody's agency.

China's Dagong Global Credit Rating Co. meantime downgraded US, German, UK and French government bonds from their "triple-A" status, highlighting instead the "wealth creating capacity" of emerging Asian economies.

"The gold market [was] desperately looking for volumes and directions," said one Hong Kong dealer overnight.

"Barring a major risk-off event," says Mitsui's London team, gold still "looks like it could be headed back to its long-term trend-line at $1165, before taking another leg higher."

"In the coming days we do not expect the gold price to quickly recover to anywhere even close to the all-time high of June," says Wolfgang Wrzesniok-Rossbach in his latest Precious Metals Weekly for German refining group Heraeus, putting gold's trading range at $1165-1245 per ounce.

"Lower gold investment demand in the last two weeks has led to further easing of delivery periods," he adds. "Of late, bars below 100 grams have been doing well, indicating that it is now the somewhat less well-to-do investors who are showing an increased appetite for gold."

Back in Tuesday's action, London's FTSE100 share index traded more than 9% above its 10-month low of July 1st, buoyed by further gains in BP stock, after analysts said the Gulf of Mexico disaster will cut $10bn off oil giant's 2010 tax bill.

Crude oil pushed back up towards $76 per barrel. Silver prices hit a 3-session high above $18.20 an ounce.

New data today UK price inflation holding above the Bank of England's official "tolerance" level of 3.0% per year on the CPI measure.

The former Retail Price Measure showed inflation holding at 5.0% per year.

The gold price in Sterling rose back above £800 an ounce, a level first broken in early May.

In Dollars, "$1200 again appears to be the approximate floor for gold prices," says the latest market note from Standard Bank, "though volumes overnight were pretty light.

"Improved corporate performance and forecasts from the likes of [aluminum producer] Alcoa and [German auto-maker] BMW – forecasting a 10% increase in sales - have boosted the global equity markets and have seen the Dollar weaken...helping gold and the platinum group metals to rally."

German economic sentiment meantime came in weaker than analysts forecast, while the United States' trade deficit widened by 5% in June to $40.3 billion.

Growth in Chinese bank lending slowed, however, slipping to 18.2% year-on-year from May's 21.5% pace.

"China's efforts to avoid overheating since the end of last year" also crimped property prices, according to one Beijing economist, with real estate showing its first month-on-month drop since the start of 2009.

Central-bank reserve managers are selling US Dollars for "smaller, less liquid" currencies such as the Australian and Canadian Dollars – rather than the Euro – reckons analyst Emma Lawson at Morgan Stanley in a new report.

"The allocation to USDs dropped to 57.3% from 58.1%" last month, according to Lawson's data, "which was unexpected given the global environment."

Allocations to British Pounds and Japanese Yen "were relatively stable at low levels."
UBS analyst today likened the Pound's outlook to the Yen's slow decline starting in the mid-1990s, citing seven reasons to sell Sterling after its recent rally, including the threat of fresh quantitative easing.

"Asia's time has come," said International Monetary Fund chief Dominique Strauss-Kahn on Monday, repeating the IMF's forecast for 7.7% annual growth in Asia's regional economy versus 3.3% in the US and just 1.0% in Europe.

Emerging-economy governments now hold 75% of the world's central-bank currency and asset reserves, but only 21% of official-sector gold bullion reserves.

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