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July 23, 2009

London Gold Market Report
by Adrian Ash

09:45 EST, Thurs 23 July

Gold Slips Below S&P Parity, But "Robustness to Continue" on Fed's Easy Policy

THE PRICE OF GOLD slipped $8 an ounce from its best level since June 12th in London on Thursday, dropping back from $957 as European stock markets struggled near break-even but US stocks began the day higher.

"We will hold our Buy Gold strategy while it continues to close above key pivot 943," says a technical note from Scotia Mocatta.

"You must watch oil closely at the moment," reckons Phil Smith at Reuters Technical India. "Its recent consolidation is having an impact on gold in terms of short-term price movements."

Playing the role of "risk-asset" once again in July - rising with commodities, non-US currencies, equities and bonds as it did between 2003 and start-2008 - gold had very nearly matched the US stock-market's 3.1% gain so far this month.

At Wednesday's New York close, the rolling one-month correlation of daily Gold Prices with US stocks averaged +0.85 for July-to-date. A perfect correlation would stand at +1.0.

Gold's correlation with the S&P sank to minus 0.84 in late February, the second time it touched $1,000 an ounce. Over the five years starting Jan. 2003, monthly changes in the Gold Price showed a correlation of +0.62 with the S&P.

Gold rose 171% during that time. US stocks added 51%.

"Gold Prices are now at par with the S&P500 around the 954 level," wrote Ashraf Laidi at CMC markets here in London on Thursday morning. That put the S&P index measured against gold "at its highest since May."

Last November, the gold price in Dollars crossed above the S&P's value for the first time in 18 years. It had closed above New York's major stock index every day since then.

"The only viable means for the equity/gold ratio to regain its 2008 highs [where the S&P reached 1.10 times the gold price] would be for the Fed to begin withdrawing liquidity without upsetting equity markets," says Laidi.

"[So] with the Fed showing no sign of drawing down its liquidity injections any time soon, gold's robustness is likely to continue."

Fed chairman Ben Bernanke yesterday stressed the options available for withdrawing "excess liquidity" once economic recovery takes hold. But with US interest rates already at zero and the Fed effectively printing $760 billion for quantitative easing, "No wonder Mr.Bernanke likes to discuss his options for tightening monetary policy," says the Economist magazine.

"They are better than his options for [further] easing."

On a quiet day for economic releases, new US jobless claims for last week came in higher than expected at the US opening on Thursday.

Government bond prices rallied, pushing 10-year US Treasury yields down to 3.54%, while the Dollar also bounced.

For UK investors looking to Buy Gold, the spot price slipped 0.7% from Wednesday's 6-week high of £581 an ounce.

The Gold Price in Euros was little changed at €669 - up 2.9% from the 3-month low of early July.

"We have been tracking the physical market closely," says Walter de Wet in today's Commodities Daily from Standard Bank in London, and "Since the start of June physical buying has supported the Gold Price.

"However, we now believe this support has turned into resistance and there is more scrap selling."

Global scrap-gold supplies were estimated as high as 1,000 tonnes between Jan. and April, equal to 40% of annual Gold Mining output, but are widely reported as falling sharply since then.

This week US scrap-gold service Cash4Gold announced its expansion into several key European markets, aiming to become the UK's biggest direct-response advertiser by Christmas.

As yet, however, it has no UK marketing agency, says MarketingDirect. "It needs to hit the ground quickly."

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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