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THE
PRICE OF GOLD dipped 0.5% Wednesday morning in London, slipping to
$1,012.50 per ounce as Asian stocks closed the day lower but European shares
rose.
Government bond prices fell, pushing the yield offered by 10-year US
Treasuries back to last week's finish near 3.47%.
Crude
oil eased back towards $71 per barrel, and the US Dollar recovered
half-a-cent from new 12-month lows at $1.4840 per Euro.
That
held the Euro gold price flat at €686.50 an ounce.
"If the market fails to break through the previous record high [at
$1,032] it could spark liquidation, which could bring gold
back below the $1,000 an ounce very quickly," one European trader told
Reuters overnight.
"A failure to move higher in the absence of fresh impetus could cause a
correction," agrees MKS Finance – a division of the Swiss refining
group – in a note, adding that right now "The gold market is
essentially Dollar driven."
But "In our opinion the US Dollar's status as a 'port' in the financial
storm has officially come to an end," says Canada's Sprott
Asset Management in a new report.
"When the world finally realizes what the US has done to the world reserve
currency, international investors will shift into an asset that no government
can print."
Due to announce its latest policy stance just after 14:00 New York time on Wednesday, the Federal
Reserve has now kept its key interest rate at zero for ten months running.
Buying $800 billion of mortgage-backed bonds to help support that market, the
Fed has also bought almost $300bn of US government bonds under its
quantitative easing program of creating new money.
Since the program began in March, the US stock market has risen by 60%.
"Even though from a technical perspective the recession is very likely
over at this point," Fed chairman Ben Bernanke said in a speech last
week, "it's still going to feel like a very weak economy for some
time."
"We don't expect the Fed to adopt a hawkish tone [today]," says
Standard Bank metals-analyst Walter de Wet in a client note, "and
believe those who expect this will be disappointed.
"A dovish tone should be supportive of precious metals. We see scope for
much more liquidity to be pushed into the system."
Short-term, "Weak physical demand for gold combined with the rapid rise
in speculative activity could give rise to a sharp correction, especially if
the US Dollar rallies," warns RBC Capital, pointing to a chart showing
what the Financial Times calls a "strong correlation" between the
volume of bullish bets held by leveraged speculators in the futures market
and the price.
Analysis by BullionVault, however, shows a stronger
correlation over the last 3 months between gold prices and the total open
interest in gold futures contracts held by both speculators and industry
players.
Last week, the correlation between total open interest and the change in gold
prices rose to +0.98, just shy of a perfect correlation – under which
they would move precisely in lock-step together – of +1.0.
"There are a number of factors supporting where the gold price is
today," said Aaron Regent, CEO of the world's largest gold miner, Barrick Gold, to the Denver Gold Forum last week.
"Certainly the economic environment is part of that. It's understandable
why gold is where it is."
Charles Jeannes, CEO of world No.3 Goldcorp agreed,
says a report from Mineweb, telling delegates that
"We're certainly in a rising price gold environment right now.
"There's a lot of reasons to be bullish about
gold going forward."
Meantime in India –
the world's hungriest physical gold market until slipping behind China at the
start of 2009 – "People will pick up gold at around $1,000 levels
or even a little above that, provided the market doesn't get volatile,"
reckons one wholesaler in Jaipur, Rajasthan,
speaking overnight to Reuters.
"Demand will be there [during the current festival season, peaking with Diwali in mid-Oct.] but prices have to be stable. Demand
was very good yesterday when gold fell below $1,000 an ounce."
On the supply side of the gold market, South Africa's fourth-largest
bank – Nedbank – said Tuesday it may
only finance large carbon-emitting projects such as mining and electricity
production if they commit to reducing their footprint.
"This should eventually raise cost of production at the mining
companies," notes Wolfgang Wrzesniok-Rossbach
in his Precious Metals Weekly for German refining group Heraeus,
"and push the price spiral further upwards."
Latest analysis from market consultants GFMS Ltd. says the average cost of
producing one ounce of gold between April and end-June reached $608,
"the second highest ever in the history of gold production"
according to Wrzesniok-Rossbach.
Only the summer of 2008 showed a higher cash-cost per ounce for gold mining
worldwide, "significantly affected by high energy costs and temporarily
stronger local currencies of producer nations" such as South Africa,
formerly the world No.1 but since pushed into second and then third place by
rising Chinese output and a halving of annual domestic production since 1998.
Adrian
Ash
Formerly
City correspondent for The Daily Reckoning in London and head of editorial at
the UK's leading financial advisory for private investors, Adrian Ash
is the editor of Gold News and head of research at BullionVault
– winner of the Queen's Award for Enterprise Innovation, 2009 –
where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing
fees.
Adrian
Ash
Head of Research
Bullionvault.com
Also
by Adrian Ash
City
correspondent for The Daily Reckoning in London,
Adrian Ash is head of research at BullionVault.com
– giving you direct access to investment gold, vaulted in Zurich, on $3 spreads
and 0.8% dealing fees.
Please
Note: This article is to inform your thinking, not
lead it. Only you can decide the best place for your money, and any decision
you make will put your money at risk. Information or data included here may
have already been overtaken by events – and must be verified elsewhere
– should you choose to act on it.
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