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June 01, 2009

London Gold Market Report
by Adrian Ash

Gold Jumps Again in USD as Geithner Mocked In China, Dollar Sinks Vs. All Assets Bar Long-Dated Treasuries

THE PRICE OF PHYSICAL GOLD jumped in US Dollars for the third session running early Monday in London, recording the best AM Gold Fix since Feb. 24th at $987 per ounce.

Stock markets also leapt worldwide - up more than 3.0% in Frankfurt - while commodities added to last month's 34-year record gains.

The US Dollar fell against all other currencies. Long-dated government bonds also fell, pushing interest rates higher.

"We believe in a Strong Dollar," said US Treasury secretary Tim Geithner to students at Peking University this weekend, "and we're going to make sure that we repair and reform the financial system so that we sustain confidence."

Geithner's speech was greeted with laughter according to the London Times.

"Chinese assets [held in Dollars] are very safe," he went on. "We're committed to bringing our fiscal deficits down over time to a sustainable level."

Today General Motors filed for bankruptcy protection, with $30 billion of government money ear-marked for restructuring the auto giant.

GM has already received $20 billion of tax-funded aid.

Economists at Barclays Capital in New York are meantime urging the US Federal Reserve to hike its "Quantitative Easing" of long-term interest rates, Reuters reports, creating three times its planned £300bn of new money to bid up government bonds and push longer-term yields lower.

The Treasury needs to sell a record $2 trillion in new US bonds this year to fund the shortfall between its spending and tax receipts.

"We see the $1000 level [in Gold] as the next obvious target from here," says the daily note from London market-makers Scotia Mocatta.

"The bullish picture for bullion is confirmed by the weekly candlesticks which have seen four consecutive up weeks for gold."

But it will be "interesting" to watch for "bouts of liquidation" in Gold Investment as the price approaches $1,000 says another London dealer.

"It is worth noting that speculators on Comex are now very long," says UBS analyst John Reade, quoted by Dow Jones, "and with no sign of strong inflows into the ETFs, the Dollar must weaken further for gold to make more ground."

Jumping 11% to the greatest level since July '08, the "net long" position in Gold Futures held by hedge funds and other large speculative players rose for the fifth week running in the week-to-last Tuesday.

Speculative gold buying on the futures market, however, remains one-seventh below the record peak hit in January last year, according to data from US regulator the CFTC.

"High returns don't tend to come from high quality assets - but wealth preservation does," says Charles Morris, manager of HSBC bank's $2-billion Absolute Return fund, speaking to Fund Strategy magazine.

His wealth management offering now holds a 10% allocation to gold.

"It's the highest quality asset of all. It's about permanence of long-term value. [Gold's] relative value through time is constant."

Monday morning saw the US Dollar fall through $1.42 per Euro for the first time in 2009.

The Euro gold price touched its best level in 5 weeks at €697 an ounce, but for Sterling investors now Ready to Buy Gold, the price fell as the Pound soared, dropping 0.8% from last week's close at £605 as the UK currency broke new 8-month highs above $1.64.

When the Pound traded at $1.64 in Jan. 2000, the UK Gold Price stood at £175 an ounce. It rose to £220 when Sterling next reached that level in Jan. 2003, and rose further to £230 an ounce, £475 and now above £600 as GBP/USD crossed that price again.

"We do not believe the IMF Gold Sales, should they occur, will harm Gold Prices," said HSBC analyst James Steel last Friday, referring to the possible approval of a 400-tonne sale by the International Monetary Fund.

The United States retains a 17% controlling vote in the IMF. Congressional approval may be sought this week.

Dollar-price gains were meantime also strong Monday morning across the commodities market, with copper breaking above $5,000 per tonne and crude oil adding 2.4% to $67.85 per barrel.

Russia's RTS stock market jumped almost 6%, while the Polish Zloty added nearly 2% vs. the Euro on the currency markets on news that Poland's industrial output shrank at a slower pace in May from April.

Operating profits at Australian corporations fell 7.2% in the first quarter from the end of 2008, new data showed, while cash earning for Japanese workers shrank 2.5% month-on-month in April.

Eurozone manufacturing sentiment improved in May on the PMI index, and rose sharply in the UK.

China's manufacturers reported the third month running of increased output.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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