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June 22, 2009

London Gold Market Report
by Adrian Ash

Gold Hits 5-Week Low Ahead of Fed's "Dollar Devaluation" Vote; Russia Builds 10th Biggest Central-Bank Holdings

THE SPOT PRICE OF physical gold sank to new 5-week lows at $924 an ounce early in London on Monday, recording the lowest Gold Fix since 18th May as the US Dollar held steady on the foreign exchanges and world stock markets fell.

Crude oil dropped back to $68.50 per barrel, and government bond prices were bid higher across the board, pushing the yield offered by 10-year US Treasury debt down to 3.72%.

Last week Nobel-winner Paul Krugman and US presidential advisor Christina Romer argued in the New York Times and Economist respectively that "It's much too soon to give up on...aggressive monetary policy and deficit spending."

Ahead of this Wednesday's monetary policy decision in Washington, "the Fed can't let up on the monetary gas at this stage - let alone apply the monetary brake," says Steve Barrow at Standard Bank.

"We believe that the Fed is engaged in actively devaluing the Dollar against local goods and services. This week it might even commit to more [quantitative easing] asset purchases, or at least switch the mix towards more Treasuries and less mortgage-backed securities.

"If this still implies a monetary policy that devalues the Dollar internally, the Dollar should devalue externally as well."

Little changed from Friday's close, however, the Dollar was today joined by most other major currencies in pushing gold lower.

Gold Futures traded in Tokyo for delivery in April 2010 slipped 0.8% against the Yen to ¥2,892 per gram, only a little above last Wednesday's five-week low.

UK buyers saw the Gold Price in Sterling drop to fresh five-month lows beneath £563 an ounce.

For Eurozone investors now Ready to Buy Gold, the price held at €666 an ounce - the very bottom of the last 12 weeks' trading range.

"The question revolves around how much Gold Investment demand do we have, how strong is it, and what happens to the gold market when investment demand goes from strongly positive to neutral or negative," says Paul Walker, CEO of London consultancy GFMS, to Canada's Financial Post.

Pointing to the risks of either strong inflation or a sound economic recovery, "We're on the cusp of two very different scenarios," Walker believes. "And I have to be intellectually honest and say that I don't know which one it is going to be."

Continuing to show a strong correlation with changes in the Gold Price, the total volume of US Gold Futures and options outstanding last week fell 3.6%, new data from regulator the CFTC said late Friday, dropping to the lowest level since early May.

The "net long" position held by hedge funds and other large speculators - equivalent to a call on 569 tonnes - fell by 9%.

New York's SPDR Gold ETF - the world's single largest gold-holding trust fund - ended last week unchanged at 1,132 tonnes.

In the official sector, meantime, new data from the World Gold Council today showed Russia adding 17 tonnes to its gold reserves so far in 2009, taking the Kremlin's hoard to tenth position in the central-bank rankings - and overtaking the European Central Bank (ECB) in Frankfurt - with 537 tonnes.

Equal to 4.0% of Russia's total currency reserves, Moscow's Gold Bullion stockpile has swelled by 15% since this time last year.

France and Sweden have continued to sell gold in contrast, divesting 41 and 4.5 tonnes respectively within the Central Bank Gold Agreement, the five-year treaty which caps sales by its 15 signatories to 500 tonnes per year.

The 400-tonne IMF Gold Sales approved last week by the US Senate are now expected to form the basis for renewal of the CBGA when it expires in September.

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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