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June 23, 2009

London Gold Market Report
by Adrian Ash

Gold Bounces Off 5-Week Low, Bernanke Accused of Stoking Mortgage Bubble, as Late Monsoon Threatens Indian Demand

THE PRICE OF WHOLESALE GOLD BULLION bounced off a new 5-week low at $914 per ounce early Tuesday in London after the US Dollar rose on the currency markets but the Japanese Yen rose faster still.

Tokyo Gold Futures closed the day 2.8% lower, and the Nikkei stock index dropped to its worst level so far this month.

Spot Gold recovered to $924 per ounce, down 1.1% from last week's finish in Dollars, as the Yen - a key funding currency for "carry trade" investors - eased back.

"Technically the [gold] market is pointing towards $900 or even $870," says one London metals dealer.

"[Monday's] close below our 100-day moving average at $927 will keep the pressure downward," agrees a technical note from Scotia Mocatta.

"We have down broken down through [the short-term] uptrend line," concurs Phil Smith at Reuters Technical India.

"While we remain generally bullish on Gold's medium to long-term outlook, our short-term outlook has turned negative," says Manqoba Madinane at Standard Bank.

Tuesday saw the rising Dollar help non-US gold investors, with the Gold Price in Sterling bouncing sharply from new 5-month lows beneath £560 an ounce.

Eurozone buyers saw the Gold Price hold near yesterday's 11-week low of €660, despite hints from the European Central Bank that it may yet cut interest rates further.

Echoing recent demands from US advisors and policy-makers that today's extraordinary stimulus should not be withdrawn until recovery is firmly established, "We are in uncharted waters and there are still risks of a sudden emergence of unexpected financial turbulence," said ECB chief Jean-Claude Trichet at a conference in Madrid on Monday.

Blaming the current financial crisis on 10 years of "unfettered speculation and gambling", Trichet said that "While there are first signs the pace of economic weakening is decelerating, we must remain alert."

The US Federal Reserve is expected to restate its commitment to near-zero interest rates and Quantitative Easing in tomorrow's monthly policy announcement.

Today the Wall Street Journal republishes an editorial from 2003 that accused then-governor Ben Bernanke of being a "speed demon Nascar driver" who should raise rates, rather than waiting, to curb rising inflation and a decline in the Dollar.

"I believe these critics are not particularly well informed and that, as a Committee, we should continue to remain patient and not choke off growth unnecessarily," said Bernanke, now Fed chairman, in comments also republished from Dec. 2003 by the WSJ and juxtaposed with the ensuing bubble in US mortgages and home-loan derivatives.

Emerging-market equities meantime fell hard early Tuesday, down 10% from May's 2009 peak and 45% below their record highs of Oct. 2007.

In US crude oil futures, "The ascending channel was invalidated for the first time," reckons Olivier Jakob at Petromatrix in Zug, Switzerland, speaking to Bloomberg, "and this clearly need to be taken as a negative."

The World Bank yesterday worsened to 2.9% its forecast for world economic shrinkage in 2009. Wall Street's S&P 500 index closed below 900 for the first time in five weeks.

The S&P has only closed above the Gold Price twice since Jan. 20th, lagging the precious metal for the first time since March 1991.

India's Economic Times today reports that local investors exposed to the Gold Price alone have significantly outperformed Gold Mining stocks over the last 12 months.

"When one invests in Gold Mining companies," a Mumbai analyst tells the paper, "the sentiment in equity markets and company specific factors also have a role to play, which sometimes outweigh the returns generated by the movement in Gold Prices."

The Business Standard meantime says that Mumbai's Gold ETFs saw net inflows of investment cash during May, bucking a 3-month trend as lower prices attracted "some increase in participation from retail investors," according to Benchmark Mutual Fund executive Sanjiv Shah.

Over in Zaveeri Bazaar, however, the city's key gold jewelry market, "Demand remains almost nil," says one dealer. "Some deals in scrap gold is happening."

The Planning Commission today claimed that the monsoon season - with rainfall currently half of average levels - may be "delayed by a couple of weeks, but it's not going to impact the economy much."

Monsoon rain levels can directly affect Gold Bullion purchases by Indian consumers - responsible for more than one-sixth of global gold jewelry demand so far this decade on VM Group's data - as two-thirds of the country's arable land depends on this seasonal deluge, and nearly 70% of the population live in rural areas.

The post-monsoon harvest in September leads into the peak gold-buying season that culminates with the Diwali festival of lights in late October.

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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