Tuesday, August 23, 2011

Odds of Gold Correction Seen Rising - August 23, 2011

London Gold Market Report
from Adrian Ash
Tues, 23 Aug. 2011

"Unreasonable Gold Nutcases" Simply Seek Shelter Says Pimco, But Odds of "Gold Correction" Seen Rising

THE PRICE of physical gold touched new record highs against all major currencies at the start of Asian trade Tuesday, falling back by 2% as European stock markets then extended their rally from the summer's near-20% plunge to date.

Industrial commodities also rallied for the second day running, while major-economy government bonds ticked lower once more, nudging interest rates higher from last week's near-record lows.

Prices to buy silver meantime fell back, together with gold, unwinding all of Monday's 2.7% rise.

"I don't have a problem with gold at $1850 or $2000," says Dundee Wealth Economics' Martin Murenbeeld in his latest Gold Monitor report.

"I have a problem with the speed with which these levels have been reached."

"Given the speed of the recent rally, the possibility of a correction is rising as investors look to bank profits," says Dr. Edel Tully at Swiss investment bank UBS's London office.

This month's 18% jump in prices to purchase physical gold "has surprised most in the market, even those in the most bullish camp," she writes. But "even if a $150 or more pullback were to materialize, we'd strongly view it as a good buying opportunity."

"Volatility should continue across the metals this week," reckons a note from Swiss refiner MKS's finance division, because "the market is still seeking for more decisive action from policy makers in Europe and the US."

Since the start of August, daily volatility in prices to buy gold has jumped. But it remains below volatility in US stock markets, and also below its own 5-year average.

"The dramatic surge in demand for gold reflects the aggregation of many investor preferences," says Mohamed El-Erian, chief executive officer of Pimco – the world's largest bond-fund management group, running $1.3 trillion in assets – "for example, from those seeking shelter from lower stock markets to those protecting against currency debasement by central banks.

"We are seeing some lasting asset-allocation shifts to gold."

"The market in physical gold is tiny, and largely comprised of nutcases," reckons Reuters' blogger Felix Salmon today.

"When you buy gold you're saying nothing is going to work and everything is going to stay ridiculous," says Mackin Pulsifer, chief investment officer of Fiduciary Trust International in New York.

"There is a fair cohort who believes this in a theological sense, but I believe it's unreasonable given the history of the United States."

Over in emerging Asia – source of more than 60% of world demand for physical gold according to data compiled for the World Gold Council – "Demand is slightly up today," said a dealer at a private bullion importing bank in Mumbai to the Economic Times of India today.

The world's heaviest buyers of physical gold, Indian households typically take a pause in the summer, ahead of the post-harvest Diwali festival season. But "I think Indian buyers have started buying stories of gold hitting $2000 mark soon," says the dealer.

With domestic price inflation running above 21% per year, Vietnam is allowing new imports of gold bullion, according to press reports, in a bid to reduce domestic gold prices compared with international bullion rates.

Central bank governor Nguyen Van Bin has set a target maximum of $20 per ounce above benchmark gold prices.

Monitoring production and gold bullion trading will enable the State Bank "to intervene effectively in the gold market to fight against gold price speculation," the central bank said on its website.

Australia and New Zealand bank ANZ meantime received regulatory approval to trade gold futures on the Shanghai Futures Exchange on Tuesday – the second foreign bank to join the Chinese derivatives exchange behind London-bullion market-maker HSBC.

ANZ is already one of six foreign players on the Shanghai Gold Exchange.

Major bullion logistics provider G4S meanwhile reported 6% annual growth in its "secure solutions" division today, with 9% growth in the emerging-economies segment contributing to first-half turnover of £3.7 billion ($6.1bn).

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 head of research at BullionVault – winner of the Queen's Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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