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June 09, 2009

London Gold Market Report
by Adrian Ash

Gold Outlook "Positive" But Major Mine Output Falling as US Fed Drops New Tool for Fighting Inflation

THE SPOT PRICE OF GOLD ticked north of a tight $6 range Tuesday lunchtime in London, moving 1.4% above yesterday's two-week low to $957 per ounce as Asian stock markets closed lower and the US Dollar eased back on the currency markets.

Government bond prices rose, pushing long-term interest rates lower. Crude oil added 1% to move back above $69 per barrel.

"In quick succession we have seen a number of rumours, the likes of which were not seen when the Dollar was slumping last month," notes Steven Barrow at Standard Bank.

Pointing to false but Dollar-positive news that UK premier Gordon Brown had resigned and that a German bank was on the verge of collapse, "This all suggests that for now at least the market has the bit between its teeth to unwind some of this Dollar weakness," Barrow says.

"In perhaps the next week or two, this psyche could generate more Dollar-supportive rumours and perhaps a stronger Dollar as well."

New data today showed German industrial output falling more than expected in April, down 21.6% from a year earlier.

Japan's machine-tool orders fell 79.3%, while Australian business conditions were seen worsening in the National Australia Bank's latest survey.

UK house prices recorded a 13.0% drop according to official government figures.

The British Pound crept back above $1.61, squashing the Gold Price in Sterling towards last Wednesday's 7-week low beneath £590 per ounce.

Eurozone investors now Ready to Buy Gold saw the price hold flat at €684.50 as the single currency failed to recover $1.40.

"Hedge funds are getting their direction from the currency markets and they have been selling gold on the Dollar's rally," reckons Koji Suzuki at SBI Futures in Tokyo, speaking to Reuters.

"We find regular investors Buying Gold as a hedge when the Dollar weakens."

After credit analysts Standard & Poor's cut the rating of Ireland's government from AAA to AA on Monday, citing a possible cost to tax-payers of €20bn ($28bn) from the recent bank rescues, the International Monetary Fund (IMF) today warned Europe to address its banking crisis and "restore confidence".

Hinting at the relatively tame Quantitative Easing promised so far by the European Central Bank (ECB), "A key missing element is a proactive strategy to deal with [Europe's] weakened financial system," says the IMF's latest assessment, "involving a review of capital needs to manage the recession, a cleansing of the financial system of its impaired assets, and a restructuring of weakened institutions."

Meantime in the United States - where banking shares have gained 49% since March - the government should repeat the "stress tests" which said 10 of the largest 19 lenders needed $75 billion in fresh capital last month, warned the Congressional Oversight Panel on Monday.

Banks have so far announced plans to raise $100bn, but the "stress tests" applied to their balance sheets assumed an average jobless rate of 8.5%.

Last week's jobs data put the 2009 average to date at 8.4%, leaving little margin for error in the Treasury's analysis.

Ten US banks may today be invited to begin repaying the emergency tax-payer funds they've received, according to press reports.

Citigroup will this week launch a $33bn cash raising, also converting $58bn of government funds into equity and leaving Washington with up to a 34% stake in the No.1 US bank.

"It's important that we have all the tools in place [for draining liquidity]," says Barney Frank, chair of the House Financial Services Committee, in a new interview.

"[But] it would be a mistake to start dealing with that before you know when, how, how much, et cetera..."

The Federal Reserve has doubled the liquidity it provides to the US economy since this time last year, growing its balance sheet to $2.1 trillion and sparking fears that inflation will follow unless the excess cash is withdrawn.

But speaking to Congress last week, central-bank chief Ben Bernanke failed to list a new tool - issuing Fed bonds - for withdrawing liquidity, and "We suspect the omission from Bernanke's litany was not a slip of the tongue," reckons Joseph Abate at Barclays Capital.

"The increased financial liquidity around the world, we expect, will eventually prove inflationary and positive for Gold Prices," says a new report from RBC Capital Markets, quoted by MineWeb in Johannesburg.

But before then, the analysis warns, South Africa's major gold-mining firms could suffer an 80% drop in quarterly earnings unless there's "either a sharp increase in the Gold Price (in Dollar terms) or a weakening of the Rand to deliver meaningful upside from current levels.

"The previously recognised 'value gap' [between SA mining stocks] relative to the Gold Price has now virtually been closed."

Already halving since 1998, South African Gold Mining output will continue to fall until 2014 said new research today, dropping further from 2008's total output of 220 tonnes.

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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