Gold Demand Swells at Record-High Prices

From Adrian Ash

BullionVault

As USD-Price Reverts to Moving with Euro

THE PRICE OF GOLD in US Dollars edged up to fresh record highs above $1283 at the start of London trading on Monday, while silver re-visited last week’s 30-year highs above $21 per ounce.

World stock markets also rose sharply, as US crude oil futures recovered to $73 per barrel.

Major government bonds slipped, nudging yields higher, but Irish and Portuguese spreads over German Bund yields rose to fresh post-Euro highs.

“Friday’s disappointing US data flow gave the gold bulls another reason to buy,” notes Leon Westgate at South Africa’s Standard Bank today.

“A weaker Dollar has added to gold’s upward momentum this morning.”

Trading around €31,500 per kilo for Euro investors today, gold stood unchanged from mid-August, despite the 3.5% rise in Dollar prices.

Priced against the US currency, in fact, gold ended Friday showing its strongest connection with the Euro since the start of July, displaying a daily correlation right in line with its 10-year average at +0.47.

Previously in 2010, in contrast, gold had averaged almost perfect non-correlation with the Euro, displaying a co-efficient of –0.06.

That figure would read +1.00 if they moved perfectly in lock-step together against the Dollar. It would stand at –1.00 if they were utterly opposed.

Gold’s correlation with the Euro hit a record low of –0.88 in May this year. It has not reached +0.90 since Feb.

“Gold [in Dollars] registered a strong up week,” notes the latest technical analysis from bullion bank Scotia Mocatta.

“The break of previous record high of $1265 opens up a new topside target of $1369,” says Russell Browne, spying the start of Wave 5 in an Elliott Wave pattern.

Over in Asia today – where the Thai government became the latest central bank to announce larger gold bullion holdings on Friday – “Volumes were quieter” following last week’s late flurry, says one Hong Kong dealer today.

Japanese traders were on holiday today to mark Respect for the Aged Day. “Besides sporadic Chinese buying, [gold deals] went through electronic trading.”

In New York, the volume of gold bullion needed to back the SPDR Gold Trust – the world’s largest gold ETF – also jumped late last week, undoing two weeks of declines to swell above 1300 tonnes.

New data released by US regulator the CFTC late Friday showed the “net long” position held by speculative traders and private investors in gold futures and options last week exceeded 1,000 tonnes equivalent for only the 7th time ever.

Rising 1.5% from the previous Tuesday’s position, the “net long” remained 2% below the record level of Dec. 2009, however, while the total “open interest” in all gold futures and options rose at its fastest pace in a month, swelling by almost 3% to stand above 822,000 contracts – just 1.6% off its record peak of May this year and larger by nearly two-thirds from its five-year average.

Meantime in the bond market, and after Barclays Capital was blamed for Friday’s slump in Irish bond prices – warning that the International Monetary Fund may still have to rescue Dublin “in the medium term”, spurring the European Central Bank to buy Irish debt in the open market – the three big ratings agencies today ranked Europe’s own stabilization program “AAA” in a flurry of announcements.

Moody’s, Fitch and Standard & Poor’s all gave the new European Financial Stability Facility their top rating, meaning its bonds – issued to finance the purchase of weaker European government bonds – can be held by pension and insurance funds worldwide.

Both Irish and Portuguese bond prices continued to fall, however, versus comparable German debt, driving their 10-year yield spreads to new record highs.

“Both governments are [also] paying yields well over the 5% that would be offered by the EFSF,” notes the FT‘s Alpha blog.

“Ireland is expected to post a [budget] deficit of 25% of GDP this year, when bank losses are added,” says Independent.ie – “the largest in Europe.”

Ireland goes to market tomorrow with an auction of four- and eight-year government bonds.

Tuesday also brings the latest US Federal Reserve decision on Dollar interest rates.

Adrian Ash

BullionVault

Gold price chart, no delay |   Buy gold online at live prices

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 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

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