London Gold Market Report – Forex Hound

Gold Recovers 1.1% Drop as "G7 Bounce" Fails to Hold for US Dollar

FOUR WEEKS AFTER Gold’s peak of $1,034 per ounce, the Gold Price recovered a 1.1% drop early Monday as the US Dollar failed to hold onto a sharp bounce following this weekend’s meeting of G7 finance ministers in Washington.

Gold Recovers 1.1% Drop as "G7 Bounce" Fails to Hold for US Dollar
 
FOUR WEEKS AFTER Gold‘s peak of $1,034 per ounce, the Gold Price recovered a 1.1% drop early Monday as the US Dollar failed to hold onto a sharp bounce following this weekend’s meeting of G7 finance ministers in Washington.

The physical Gold Market had earlier slipped to a three-day low beneath $915 per ounce and the Euro gapped down 1.5¢ against the Dollar at the opening in Asia.

The US Dollar initially knocked 1.3% off the Japanese Yen, too, after the G7 noted "sharp fluctuations in major currencies [and] their possible implications for economic and financial stability."

But the Group of Seven rich nations stopped short of announcing any formal G7 Action in the Currency Markets – leaving the Euro to recover all of its losses at $1.5840 by lunchtime in Frankfurt.

 
The G7 instead chose to discuss social unrest in emerging economies caused by surging food prices. The Group’s Financial Stability Forum also called for "full and prompt" disclosure of all risk exposure and write-downs by Western investment banks.

Looking ahead to this week’s Wall Street earnings results, "the market expects further write-downs of $7bn for Merrill Lynch [on Thurs] and $10bn for Citi [on Fri]," says today’s Gold Market note from Standard Bank.

"[That] should dampen investor sentiment and raise risk aversion – at least in the near term."

Today’s Wall Street Journal reports a new capital issue worth $7 billion for Wachovia, the fourth largest bank in the United States, achieved at a 15% discount to Friday’s closing stock price.

The WSJ also says Deutsche Bank wants to offload $20bn of leveraged loans made to private-equity investors.

Here in London, financial shares continued to fall for the fifth session running early Monday despite Bradford & Bingley – the UK’s fifth largest mortgage lender – denying rumors that it’s also seeking to raise cash through a rights issue.

Government-bond yields rose in all major markets even as European Central Bank member Yves Mersch told reporters the ECB cannot cut Eurozone interest rates in 2008 because of rising inflation.

The open-market rate for three-month Euro loans today reached its highest level since 27th Dec. up at 4.75% – fully 75 basis points above the ECB’s current target for overnight rates.

This weekend’s G7 communique noted volatility in the forex markets for the first time since 2004 – and it explicitly stated their joint concern over the resulting risks to stability and growth for the first time since the Euro slump of 2000.

But "lacking any specific reference to the US Dollar," says Danica Hampton at the Bank of New Zealand, "[it] suggests the G7 remains concerned about volatility rather than specific levels.

"At some point in the coming weeks, we’d expect Dollar sellers to return as the market tests the G7’s resolve on coordinated intervention."

Crude oil held just shy of $110 per barrel early Monday on news of a cracked pipeline in the US mid-west. High winds forced the closure of two ports in the Gulf of Mexico overnight.

Asian stock markets fell sharply, losing 5.5% in Shanghai and 3.5% in Hong Kong in a broad-based sell off following General Electrics’ profits warning to the US markets on Friday.

Shares in Sino Gold Mining – owner of China’s second-largest gold mine – today dumped 12% on the Australian stock exchange in Sydney after it cut output forecasts for 2008 by more than 20%.

Production costs will rise by almost one quarter due to power restrictions and Sino having to mine lower grade ore.

In the physical Gold Market, Tokyo gold futures slipped 1.5% meantime, holding just above ¥3,000 per gram.

Strong volatility on the currency markets left prices for British and European investors looking to Buy Gold today little changed by lunchtime, while Philips Electronics added to last week’s stock-market gloom by reporting a 28% drop in core profits, well below consensus forecasts.

Growth in industrial production slowed to 3.1% from 3.3% annually in the 15-nation Eurozone during Feb., the EuroStat agency said this morning.

Here in the United Kingdom, input price inflation for manufacturers surged to a new record of 20.4% in the year-to-March.

Output prices rose at a 17-year record of 6.2%.

"Nobody has brought on any new supply of anything in the past 25 or 30 years," says commodity-fund manager Jim Rogers in the latest edition of Barron’s magazine.

"The last gigantic oil field was discovered in the 1960s. The number of acres devoted to wheat farming has been declining for more than 30 years. Food inventories are the lowest they’ve been in 60 years."

 
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 and vault it securely in Zurich, Switzerland for just 0.12% per year.
 
(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.