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June 24, 2009

London Gold Market Report
by Adrian Ash

Gold Jumps as ECB Front-Runs the Fed, Lends Near-Half Trillion Euros at 1.0%

THE PRICE O GOLD leapt overnight and early Wednesday, recovering all and more of this week's losses at $938 an ounce as world stock markets ticked higher but crude oil slipped for the second day running.

US Treasury bond prices also drifted as the US Dollar Index held flat ahead of today's interest-rate announcement from the Federal Reserve, widely expected to reaffirm its commitment to Quantitative Easing and 0% interest rates.

The world's No.1 reserve currency rose however against its main competitor, the Euro, after the European Central Bank pumped a record €442 billion ($618bn) into the region's banks, offering unlimited loans for 12 months at the current policy rate of just 1%.

French, German and Italian investors saw the Gold Price in Euros bounce sharply from its lowest level since April 6th at €655 an ounce.

For British investors now Ready to Buy Gold the price recovered last Friday's close after hitting its lowest London Fix since Jan. 9th at £560.47.

"Across all of the metals, there appears to be a battle emerging between short-term players anticipating a weaker summer period and participants willing to look at the longer-term picture and seeing value at current price levels," says today's Commodities Daily from Standard Bank.

Gold Bullion, however, "has lost momentum" in the short term reckons Walter de Wet. "Should the Fed not produce any major surprises, selling gold into rallies would be our preferred strategy.

"The forces behind a push for higher Gold Prices are being offset by those favouring lower prices," agrees the latest Fortis Bank Metals Monthly from VM Group in London.

"In such a scenario, the exchange-rate fluctuations account for most of the [Dollar] price moves - a situation we expect to persist for some time to come. When little else is going on, gold inversely follows the dollar quite closely, but more pronouncedly."

VM's analysts believe "the next major event in the gold market" will be the renewal in Sept. of the Central Bank Gold Agreement (CBGA), plus further details of the IMF Gold Sales effectively approved by US law-makers, thus giving their casting vote in such decisions at the International Monetary Fund.

"With only a little over three months to go in the current CBGA," they add, "it is likely the IMF will be the lynchpin of a new agreement."

New data out Tuesday showed that Eurozone gold reserves shrank by €20 million last week due to a sale by one member bank.

Despite selling well over 2,500 tonnes of gold since the first Central Bank Gold Agreement was signed in Sept. 1999, Europe's central-bank gold reserves have more than doubled in value, rising 12% per year on average from a low of €250 an ounce.

In a speech marking the Ifo think-tank's 60th anniversary on Tuesday, "An early withdrawal [of monetary stimulus] must be avoided," said ECB member Axel Weber of the German Bundesbank.

"We have to be ready to withdraw liquidity gradually [but] today we have no need to start or even to prepare for an imminent start to that operation," agreed fellow ECB member Christian Noyer of the Banque de France at a press conference in Paris.

News of today's extraordinary banking loans sent the Euro sharply lower on the forex market, down to a new low for 2009 vs. the Pound and 1.5 cents lower to $1.4010vs. the Dollar.

Now used by 350 million people across the 16-nation Eurozone, the currency had previously regained half of last year's 25% loss against the Dollar. The stronger currency has helped push price-inflation lower still in Germany, down towards 0%, as the economy suffers its worst contraction since World War II.

Today the Organization for Economic Cooperation and Development in Paris halved its expected loss in the US economy for 2009 and forecast an upturn in 2010. But the OECD worsened its forecast for the Eurozone to a 4.8% contraction.

"Withdrawing stimulus too early could jeopardize the weak recovery," warned OECD chief economist Jorgen Elmeskov, adding that structural long-lasting unemployment in the Eurozone will rise by two percentage as a result of the recession sparked by the financial crisis.

Calling it perhaps "a reason to be cheerful" last week, UK policy-maker Paul Tucker of the Bank of England noted that "the substantial depreciation of the exchange rate during 2008 should support UK exports and inhibit the demand for imports" - a point also noted by governor Mervyn King as the Bank slashed its key lending rate to 0.5%, higher than the Federal Reserve but just half that of the current ECB stance.

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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