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June 08, 2009

London Gold Market Report
by Adrian Ash

Gold Falls to 10-Day Low vs. Dollar After Speculative Buying Hits 14-Month Peak

THE PRICE OF GOLD sank to a 10-day low versus the Dollar as the New York opening drew near on Monday morning, holding little changed for non-US investors as the world's No.1 reserve currency rose and stock markets fell.

Crude oil slipped below $68 per barrel, more than twice its level of four months ago, after briefly peaking above $70 on Friday.

Long-term government bonds meantime rose in price, pushing the annual yield offered to new buyers of UK and German debt lower from last week's multi-month highs.

"Higher long-term interest and mortgage rates could scupper the apparent green shoots of [US] economic recovery," says the latest Metal Matters from Scotia Mocatta, the London market maker.

"In addition, regardless of how it is funded, foreign investors seem more and more concerned that the creation of so much debt burden will devalue the Dollar anyway. As such, the financial crisis seems far from over and any pickup in the crisis again is likely to boost demand for Gold."

"Since the credit crisis began," says Wharton professor Jeremy Siegel on Yahoo, "the Federal Reserve has more than doubled the supply of its own money, and government deficits are running into the trillions of dollars. Many believe this will inevitably lead to rapid inflation.

"Once confidence returns, the Fed must pull back the money it loaned and the government must bring deficits under control. This will inevitably mean raising interest rates, and the latest increase in long-term treasury rates is a clear signal that the bond market sees this happening soon."

Advising on the same problem, "Bond investors should confine [their portfolios] to the front end of yield curves where continuing low yields and downside price protection is more probable," says Bill Gross, head of the world's largest bond manager Pimco.

"Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same."

After Russia offered to buy $10 billion of International Monetary Fund bonds last week, Chinese officials confirmed on Friday they were "actively considering" an investment of $50 billion in IMF debt, possibly denominated outside of US Dollars.

Meantime in the Gold Investment market, hedge funds and other speculators last week built their largest "net long" position in futures and options since the metal hit an all-time Dollar high of $1,032 in March '08.

Holding more than nine bullish contracts for each of their short contracts, speculative traders held four times as many "up" bets on gold as they did in Nov. last year. Whereas traders acting for miners, refiners and bullion banks in contrast - sometimes called the "smart money" for their knack of second-guessing prices - last week grew their "net short" position yet again, raising it by more than 10% from the end of May.

For every bullish contract on gold held by these commercial traders, this group of "industry players" also held three bearish bets - the strongest weighting since Oct. 2007.

"Gold still managed to attract institutional investment interest" during the last 3 days' drop, says Walter de Wet at Standard Bank today, "with Gold ETF investment holdings rising. This should support gold today.

"However, further US Dollar strength could limit upside potential for gold despite increased institutional investment. Primary support and resistance are at $946 and $977 respectively."

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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