Gold Dips Below $900 as Paulson (Almost) Admits Recession, Bond Yields Drop, Inflation Threat Grows

THE SPOT PRICE OF GOLD gave back an overnight rally to $905 per ounce early in London on Thursday, slipping $10 per ounce as the US open drew near.

Government debt prices ticked higher, pushing US bond yields further below the rate of inflation, as Asian stock markets closed higher but Wall Street futures pointed lower after US Treasury secretary Hank Paulson finally admitted that "we need to have this correction."

THE SPOT PRICE OF GOLD gave back an overnight rally to $905 per ounce early in London on Thursday, slipping $10 per ounce as the US open drew near.

Government debt prices ticked higher, pushing US bond yields further below the rate of inflation, as Asian stock markets closed higher but Wall Street futures pointed lower after US Treasury secretary Hank Paulson finally admitted that "we need to have this correction."

"There is no doubt we’re having a tough quarter," Paulson said to reporters in Beijing today. "The economy has turned down sharply.

Paulson remarks turned European stocks sharply down, reversing an earlier gain to put the FTSE100 some 0.5% lower by lunchtime in London.

The US Dollar in contrast pushed ahead with its three-day rally vs. the other major world currencies after Paulson said the United States welcomes the "the accelerated pace of appreciation" in China’s currency.

Between Jan. and April the Yuan (or Renminbi) rose 4% vs. the Dollar. It’s gained almost one-fifth since daily trading limits were widened by the Beijing authorities in summer 2005, but the Dollar extended a ten-session rally to CNY 7.02.

"The recovery in the Dollar at this point is just corrective," reckons Robin Wilkin, chief technical analyst for commodities and forex at J.P.Morgan in London.

Friday will bring the key Non-Farm Payrolls report from the Bureau for Labor Statistics, widely forecast to show 50,000 job losses in the US economy. A private-sector report issued Wednesday however showed a net increase of 8,000 jobs in March.

For the Gold Market "there is still the risk of a deeper correction into the $850-$825 over the next few days. [But] the longer term bull trend in gold is ongoing."

Today in Shanghai the mainland Chinese stock market rose 3% to unwind a little of its $1.3 trillion losses since December.

Tokyo stocks rose 1.5% on the Nikkei, while Tocom gold futures rose 2.1% to close just shy of ¥3,000 per gram.

The Japanese currency meantime fell to almost ¥103 per Dollar, a four-week low, while the Euro slid two cents lower on a raft of poor European data.

The single currency reached $1.5510 after German services showed a marked slowdown and Eurozone retail sales contracted 0.2% year-on-year in Feb. That helped the Gold Price in Euros hold around €575 per ounce, more than 2.5% above Tuesday’s four-month low. (Might that level prove A New Floor in the Gold Price? Find out here…)

"There’s still a possibility for gold prices to recover further at some point in the coming quarter," believes David Moore at Commonwealth Bank of Australia in Sydney.

"A lot would depend on the trends in the US Dollar and also I think the Gold Market will be watching the Fed action in coming months. I think the prices could sort of hold roughly around the current levels in the near term."

Yesterday Ben Bernanke, chairman of the Federal Reserve, told the Joint Economic Committee in Congress that he stepped in help bail-out Bear Stearns – formerly the fifth largest US bank – because "the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain.

"Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability."

The Fed offered to support unsellable bonds held by Bear Stearns with an open-ended $29 billion loan "to prevent a disorderly failure…and the unpredictable but likely severe consequences for market functioning and the broader economy."

Over in the raw materials sector on Thursday, broad commodity indexes dropped 0.5% as base metals were mixed and crude oil dropped a dollar to $103.60 per barrel.

Wheat futures traded in South Africa – continent’s No.3 producer – rose for the first time in a week after surging at the start of 2008.

Global wheat prices now stand at twice their 25-year average. The price of food staples has risen by 80% in the last three years, according to Reuters, with rice hitting a 19-year high this week.

The World Bank now believes that 33 countries face social unrest as a result of the growing inflation threat.

"We need a new deal for global food policy," World Bank president Robert Zoellick – a former US negotiator – told a press conference ahead of next week’s meeting of the International Monetary Fund in Washington.

Responding to recent trade barriers imposed by Argentina, Saudi Arabia, India, the Philippines and Vietnam to cap food exports and limit food-price inflation, "this new deal should focus [on] the interconnections with energy, yields, climate change, investment, the marginalization of women and others, and economic resiliency and growth," he said.

 
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 – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
 
(c) BullionVault 2008
 

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 ? where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.