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June 15, 2009

London Gold Market Report
by Adrian Ash

Gold Falls vs. "Good Shape" Dollar with Stocks & Commodities; Swiss Urged to Return to "Healthy" Gold-Backed Currency

THE SPOT PRICE OF gold fell for US investors but held steady outside the Dollar early Monday as world stock markets and "risk assets" tumbled in the face of a fast-strengthening US currency.

Recording the lowest AM Gold Fix in three weeks at $932 an ounce, gold fell 0.8% vs. the Dollar after Russian finance minister Alexei Kudrin said the US currency was "in good shape" at this weekend's G8 summit of leading economies in Lecce, Italy.

"It's too early to speak of an alternative reserve currency," Kudrin told Bloomberg News, disappointing traders who'd expected negative comments at this week's summit of emerging giants Brazil, Russia, India and China, starting tomorrow in the central Russian city of Yekaterinburg.

Commodity prices fell hard as the Dollar leapt early Monday, with copper losing 2.5% as cocoa dropped 4% and crude oil slipped back to $71 per barrel.

Major-economy government bond prices rose, pushing long-term US interest rates lower from last week's 8-month highs.

"We did see physical and bargain gold buying from Far East interests," said one Hong Kong metals dealer, "but a disappointing amount."

"At present, there are many reasons for acting more cautiously on the gold market," says analysis from Dresdner Klienwort, quoted by the Financial Times.

"Regardless of the market reaction, the medium-term risk of a strong inflation has abated. Second, jewelry demand remains very weak, as gold jewelry is a luxury good and demand declines in an economic crisis. In our view, gold will continue to be impacted by the US Dollar."

Early Monday the Dollar drove the European single currency back to a one-week low near $1.3850 and briefly touched ¥98.50 to the Japanese Yen - up more than 12% from the 14-year lows hit this January.

The Dollar rally left the Gold Price for UK investors unchanged from Friday's close at £571 an ounce. French, German and Italian savers now Ready to Buy Gold saw it rise 0.6% from last week's 1-month low to €674.

The "net long" position held by speculative traders in US Gold Futures shrank by 2% in the week to last Tuesday, new data showed after Friday's close, displaying a near-perfect correlation with weekly Gold Prices over the last month.

Hedge funds and other large speculators remained pretty much "all in", however, holding a bullish position equal to 626 tonnes of metal - almost 90% of the all-time peaks hit in Oct. 2007 and Jan. 2008.

"We still view the [technical] price structures to be positive for $1,000 and above as long as $915 remains undisturbed," writes T.Gnanasekaar of Commtrendz Research for India's Hindu Business Line today.

"Very important trendline support is at $923-24 an ounce."

But "With the weight of speculative longs on Comex [Gold Futures] still overhanging the market," says UBS analyst John Reade in a note to clients, "we would not be surprised to see further declines - especially in the absence of any material jewelry, physical investment or ETF demand."

Ahead of Tuesday's Consumer Price Inflation data from both the UK and the Eurozone, employment payrolls in the 16-nation currency union were today shown falling 1.2% in the year-to-April, the worst drop since records began in 1995.

The fall came despite the currency union swelling by 5.5 million citizens with Slovakia's accession to the Euro on New Year's Day.

Switzerland meantime reported a 5.0% annual drop in its Producer & Import Price index as last summer's peak in crude oil prices extended the year-on-year drop.

Today three Swiss politicians from the center-right SVP called for a "healthy currency" referendum to reverse the 1999 vote which cut the link between Switzerland's currency, the Franc, and the partial backing of its central-bank Gold Bullion holdings.

"Foreign central banks have a limited range of assets they can buy," notes Steve Barrow at Standard Bank today. "They are almost forced buyers of [US] Treasuries - as many officials are willing to admit.

"But the private sector...asset managers, pension funds, hedge funds, life insurers and others that, together, buy more Treasuries than the central banks...has no such constraint. The danger is that declining risk aversion leads the private sector to ditch the safety of Treasuries for the extra risk of stocks and corporate debt. Indeed, given the way that Treasury yields have surged in April and May (where we do not have the data yet) it seems as if this has already started to happen."

Here in London, "There is no denying that the Bank of England's [bond-buying] programme has helped the Debt Management Office to fulfill its remit so far this financial year," writes Melanie Baker and Owen Roberts at Morgan Stanley.

Guessing that a quarter of the UK government's recent sales of new debt found a home at the central bank - and with a total £80 billion ($130bn) of gilts now bought via new money creation - "When demand for gilts from the BoE comes to an end, another buyer will need to be found," they add.

This week the UK government may try to raise £5 billion of new finance by selling gilts through commercial banks Barclays, Goldman Sachs and HSBC.

"Growth should remain the principal focus of policy," said US Treasury secretary Tim Geithner at the weekend's G8 summit in Italy, countering discussion of an 'exit plan' from current bail-outs and record-low interest rates by other member states.

"We're not there yet, no one is talking about exiting yet," agreed UK finance minister Alistair Darling.

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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