THE PRICE OF GOLD sank through $1200 an ounce for the first time in 3 days on Friday, falling fast to $1190 and below on news that US unemployment rose by just 11,000 last month.
Wall Street analysts had expected 111,000 job losses for November. The unemployment rate ticked down to 10.0%.
“We are bullish while [gold] achieves fresh highs, but cautious of any quick reversal,” said the latest technical analysis from Scotia Mocatta this morning, suggesting a trailing stop loss “below 1183 for short-term traders.”
“We believe that gold will have to shift into the slow lane,” says Wolfgang Wrzesniok-Rossbach at German refining group Heraeus in his latest Precious Metals Monthly.
“At some point or other, the price will undergo a significant correction. What event might trigger such a fall and at what level this process will start, however, remains to be seen. [But] the price targets, on the other hand, seem somewhat clear:
“$1080, $1050 and $1025 each represent powerful support levels on the charts.”
The US Dollar leapt on Friday’s jobs news, while London’s FTSE100 share index reversed an earlier 0.6% loss, rising fast alongside French and German stocks.
Government bonds fell hard, driving 10-year US Treasury yields up to 3.70%.
The gold price also extended its retreat against other major currencies, dropping 1.2% through €800 and losing 2.5% from Thursday’s all-time high vs. the Pound.
The UK Treasury today leaked news that next week’s pre-budget report will not apply “any dramatic fiscal tightening”.
British investors looking to buy gold lunchtime Friday saw the price slip to a near 4-session low of £718 an ounce.
“A rally like this one cannot continue forever,” said Mitsui in its Friday note, but “with the momentum the yellow metal has been carrying, it is risky business to stand in its way.”
Nineteen out of 24 professional traders and analysts interviewed by Bloomberg today reckon that gold will rise next week, the newswire says.
Reuters in contrast says that “most” of the 33 professionals it surveyed this week saw gold prices hitting a correction before year-end.
Over in the official sector meantime, “China has the scope to step up gold purchases but should take a long-term approach, avoiding the open market,” said Zhang Bingnan, a senior member of the China Gold Association, to Reuters at the Shanghai Gold Conference on Thursday.
“If we adopt a too aggressive and rash manner, it is not practical,” he said.
China is now the world’s No.1 gold mining nation. The People’s Bank is widely thought to have grown its gold reserves by buying domestic production direct.
Private Chinese gold buying will overtake Indian demand this year, GFMS consultancy chairman Phillip Klapwijk confirmed at the same conference today, forecasting consumer off-take of 432 tonnes vs. India’s 422.
Gold is a safe haven because there is “no violation of contract,” the China Gold Association’s Zhang said to Reuters.
“Gold is the only non-credit product in the financial market.”
Writing in a Communist Party newspaper, Li Wei – vice director of Beijing’s Assets Supervision & Administration Commission – said Thursday that “intentionally complex and highly leveraged products were fraudulently peddled [to China] by international investment banks with evil intentions.
“To a certain extent some international investment banks were the chief criminals and the root of ruin for the Chinese enterprises who encountered this financial derivatives Waterloo,” Li said of the post-Lehmans’ slump, reporting a 9% loss on $18.3 billion of hedging and speculative contracts held by some 130 state-owned firms.
Swiss banking giant UBS and the Standard & Poor’s rating agency yesterday announced a new “S&P500 Gold Hedged Index”, based on the total return of the S&P 500 stock market index but with an added position of long gold futures contracts.
“In a gold-hedged strategy,” said Liz Taxin, S&P’s director of strategy, “investors are seeking to eliminate the risk of US Dollar fluctuations and are therefore willing to sacrifice potential currency gains against gold.”
Looking ahead to 2010 in the forex market, “Amongst the major currencies there’s three specific risks next year,” says Steven Barrow at Standard Bank in London today.
“One is that the Dollar falls far quicker than expected, another is that we see bailouts in the Eurozone, and another is that we see a hung parliament in the UK election.”
Yesterday the US, European and UK central banks all signaled changes to their emergency aid to domestic financial houses.
The Bank of England said it may sell as well as buy corporate bonds – currently totaling £1.5 billion ($2.6bn) of its £185bn quantitative easing purchases – using the proceeds to support new non-government debt issues.
Holding its key lending rate at 1.0%, the European Central Bank said the final chunk of its 12-month loans to Eurozone banks will be charged not at that all-time record low, but at the average ECB lending rate of the coming year.
In Washington, Ben Bernanke told the Senate committee set to vote on his second five-year term as US Fed chairman that his central bank will withdraw liquidity at an “appropriate time and pace”.
Analysts noted that he failed to repeat the Federal Reserve’s recent statement that it would keep interest rates “exceptionally low for an extended period.”
“The ECB’s move just marks the beginning of an end and has been widely expected. The recent rally in gold was built on expectations that the ECB will move ahead of the Fed,” reckons Market Strategy Institute Analyst Koichiro Kamei in Tokyo.
Germany’s finance minister Wolfgang Schaeuble warned this week of a “second credit crunch” unless bank lending to small and medium-size businesses improves.
Adrian Ash
for Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com
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good one cb…I like the part which says “Anyone forging it would be punished with death”..shame it can’t be applied today..or can it? There would be a lot of vacancies in the banking industry if it did!
Out of all the fiat currencies ever manufactured in the history of the planet, ALL have failed. Remarkebly gold and silver is as valid today as it was 5,000 years ago.
That’s it, Nick. One way of putting it is that the problem is with us people in general. Where money is concerned, there isn’t enough for anyone’s greed. And if something as cheap and abundant as paper is allowed to be made into money, then those who have the licence to turn it into money will not have the necessary discipline to keep supply in line with GDP, because of that fundamental problem. Instead, they will keep printing and printing, until people lose faith in their currency and rate it no more valuable than the falling leaves in autumn. You need a commodity with limited supply to maintain discipline, and the precious metals meet this requirement, along with others that make them into ideal forms of money.
This one is a more comprehensive treatment of the question of money, and more contemporary:
http://www.kwaves.com/fiat.htm
etch – yes, you are quite right. The only thing keeping them away from the electric chair is that they have a licence from the politicians to print as much as they can shamelessly justify to themselves of it. But the consequence is that those of us already holding earlier printed dollars, storing the value of our labour and savings in them, are being diluted by the freshly printed notes, the purchasing power of which necessarily has to be shared across all notes, no matter when any one of them was printed.
Sorry, that was you, Nick. Got a little lost there for a moment.
What worries me about the gold price (for the sake of disclosure I have to admit to selling out of a gold stock on Friday) is that the rise is occurring in a deflationary environment which, traditionally, gold does not do well in. It does well in inflationary environments as we saw in the 70′s. I think gold has a future but not yet. And I have put my money where my mouth is and sold out. Means nutting of course but there it is.
Excellent CNBC article GB
That’s not to say that you are not right CB, all the right things are in place for inflation to occur which would be good for gold I just don’t see inflation occurring just yet.
Kevin B, you might want to research that idea further. While it is true that gold will tend to do well in inflationary environments, that is only a quarter of it. Gold does best in times of financial uncertainty, when counterparty risk is high, and when businesses, banks, entire economies, currencies, and even governments are at hightened risk of bankruptcy and failure. These are the times when you need gold most, as it is payment in full, and nobody’s liability.
Why do you think that more and more central banks are becoming buyers?
Anyhow, if you only sold out the other day, you have done well. I sold out of gold mining stocks, at the bottom. Held onto physical, though, and will not let go for a long time yet.
And, I should add, not because I am expecting high inflation, but because I see uncertainty going forward, probably on account of more deflationary pressures and more and more bankruptcies. So, my rationale in fact is factoring in more of a deflationary period and the failures and collapses that will mean, rather than high inflation, which probably is going to come one day, but probably not just yet.
Interesing contrast, though.
Kevin B, here is an interesting question to which I do not know the answer. The news is everywhere that North Korea’s currency has been suddenly devalued, wiping out most people’s savings. But anyone who kept their savings in physical metal would have escaped this disaster. Not sure, however, about stock ownership. How would stocks holders fare in a sudden currency devaluation? Would they be forced to take a hit as if their investment was in cash, or would they still hold the number of shares they had, but now valued and quoted in the new currency?
Home and land ownership, I assume, would also protect savings held in those assets, but again, what about debts? Would the value of debts be wiped out in such an event, along with the value of cash and digitally recorded cash deposits in a bank account?
Can anybody help out here?
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