Gold Futures Climb to two-and-a-half-month High

Gold revs its engine and squeals down the track

Prices were stuck in a $50 trading range until the Fed sent the dollar reeling

By Myra P. Saefong, MarketWatch

June 27, 2008

SAN FRANCISCO (MarketWatch) -- The U.S. Federal Reserve gave gold the fuel it needed to restart its engine and the precious metal has already driven through the trading range barrier it's been stuck in for the past month. 

Gold futures had been trapped in a $50 trading range between $860 and $910 an ounce on the New York Mercantile Exchange since May 28. It climbed past $920 in electronic trading Thursday evening as the U.S. dollar slumped in reaction to the Fed's failure to signal urgency to raise rates to curb inflation.

On Wednesday, the Fed decided to hold short-term interest rates steady at 2%, but sharpened its focus on inflation, saying that the risks posed to the economy by upward pressure on prices have increased.

"Gold broke decisively out of the trading range that had constrained it as investors came to realize that the Federal Reserve won't be able to begin a rate-hike campaign until 2009," said Brien Lundin, editor of Gold Newsletter.

The Fed's policy statement essentially acknowledged the "trick box" the central bank is in -- "facing growing inflationary pressures, but unable to raise rates while economic conditions are so weak and with a national election so near," he said.

That combined with growing expectations that the European central bank will begin its own rate hikes well before the Fed can act to create a bearish environment for the U.S. dollar which in turn, provided a very bullish outlook for gold, he said.

"People are finally coming out of the fog and realizing that we're in a world of hurt and people are plain scared," said Dale Doelling, chief market technician at Trends In Commodities.

"Stocks are in the toilet, the dollar is getting hammered, oil is going through the roof, food commodities are in the stratosphere [so] there's only one solution," he said. "Buy gold! Buy silver! Buy them because they're the only defense against what's happening in all the other markets."

Fed Muck

James Steel of HSBC says that record-high crude oil and dollar weakness are boosting gold prices. (June 27)

Fed Chairman Ben Bernanke is "caught between wilting growth and rising inflation," said Julian Phillips, an analyst at GoldForecaster.com. "With such toothless words against inflation, their rate-holding action told [everyone] that they can expect no interest rate support for the dollar in the foreseeable future." "This is positive for precious metals," he said.

Gold's value as a hedge against inflation -- especially as it pertains to a weakening dollar and rising oil prices -- helped lift prices for the metal to nearly $1,034 an ounce in mid-March, the highest futures price level ever recorded. 

And with ongoing concerns about inflation and a slowing economy, gold may be poised to return to record territory, analysts said.

"Inflation is a lot like toothpaste -- once it is out, it is very hard to get back into the tube," said David Beahm, a vice president at coin and precious metals retailer. And gold is a "tremendous hedge to both protect wealth during these inflationary periods and also generate positive investment returns when other asset classes decline in value."

The Fed's policy statement noted "two situations weighing on the economy: tight credit and the housing contraction -- that could be best addressed by an accommodative monetary stance," said Lundin. But at the same time, it noted just one, high energy prices that could be combated by a tighter monetary policy.

Crude prices climbed near a record $140 a barrel earlier this month and U.S. retail prices for regular gasoline stand near an all-time high above $4 a gallon.

"In short, they're damned if they do and damned if they don't," said Lundin. The Fed can only talk inflation down and talk the dollar up for now. "It won't be able to take any real, substantive action until after the fall elections."

Dollar Doom is Gold's Boom

Of course, at the root of the issue for gold is the dollar, Lundin said.

"Whatever developments drive the greenback will send gold in the opposite direction," he said.

The Fed can protect the U.S. dollar by sharply increasing rates, but that would sink the economy and make servicing our huge debt loads unmanageable, said Peter Spina, an analyst at GoldSeek.com. So the Fed "must keep rates low and keep liquidity in the system, which will ultimately lead to further debasement of the dollar's value," he said.

Protection for the dollar can really only come in the form of confidence or perception and then capital controls, he said.

Spina said he senses "increasing desperation" on the Fed's part and if the economy hasn't recovered as we enter 2009, "the confidence game could unwind quickly."

The Fed is "in a corner and the U.S. dollar is going to be a victim of their policies," Spina said. "It already has been punished harshly."  . . .

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Carolyn Cui and James Areddy | April 02, 2008

GOLD-BUG fever is spreading.

From China to the Middle East, new ways to invest in gold are rapidly popping up in developing countries.

It's transforming the market for one of mankind's most venerable ways to sock away wealth.

The door is opening to a new class of investors who previously wouldn't have had access to gold futures and other tools.

Their rush to invest has helped fuel soaring prices - gold crossed $US900 an ounce for a time in the past week, and there are some calls for $US1000 - while adding volatile new dynamics to the market.

On January 9, thousands of Chinese investors jumped into the bullion market when the country's first gold futures contract were launched. Futures are agreements to buy or sell something at an agreed upon price in the future, and are traditionally the domain of the pros, not individuals.

So far, it's been a bumpy road: the most active June contract soared 6.3 per cent on its debut day, then tumbled 3.7 per cent on day two.

A slew of other new investments like these are planned in markets from Dubai to Mumbai.

In India, the top lender, State Bank of India, plans this year to launch an exchange traded fund that focuses on gold - enabling investors to trade gold much like a regular stock.

The World Gold Council, a London-based gold-mining industry group, says it is seeking to roll out its first gold ETF in Dubai this year, pending regulatory approval.

Last August, the Osaka Securities Exchange in Japan rolled out a gold-linked bond aimed at smaller investors.

In one of the largest recent scandals, a Shanghai trading firm, Liantai Gold Products, managed to find a way to trade gold futures contracts overseas - circumventing Chinese law - only to lose millions of dollars of its clients' money in the process.

Liantai's total trading volume once reached a remarkable 11.9 billion yuan ($1.86 billion), according to court documents.

The case is pending.

Until recently, most buying and selling of gold in China required lugging the metal between brokers and haggling over prices.

As recently as a decade or so ago, when Chinese tourists were first permitted to travel to Hong Kong in significant numbers, they often descended first on gold shops in the former British colony to stock up.

Only in 2002 did investors in China get the ability to trade physical gold on the Shanghai Gold Exchange, though individuals couldn't invest in actual bullion until 2005.

Even then, the opening was limited.

Today, however, some of the new products emerging in China and elsewhere can be traded over the internet like stocks.

The Shanghai Futures Exchange has warned that the product is primarily meant for big trading firms or gold consumers and producers, such as the nation's expanding gold-mining and electronics industries.

Yuan Lianbo, who heads the gold trading desk at Shandong Gold Group, one of the country's biggest gold miners, says his company has already started trading the Shanghai futures contract to hedge its price risks.

Just before trading began, the exchange tried to limit speculation by individuals by more than tripling the size of a single futures contract to one kilogram of gold from 300 grams.

It also increased the amount of margin, or collateral, that investors must post, to 9 per cent from 7 per cent of the value of the contract.

Still, while those moves lifted the minimum investment to about $US2700, analysts say gold futures are still affordable to many Chinese investors.

Among those clients signing up to trade the gold contract through brokerage China International Futures, "about 90 per cent are individual investors, most of whom were moving assets from stocks after turning bearish on the stock markets", says Lei Hongjun, deputy manager of the firm's Ningbo branch. China's stock market shot up 97 per cent in 2007, but recently has tumbled 13 per cent from its peak in October.

Of course, the new ability to trade gold in China won't automatically result in higher prices, analysts say.

But the new contract's movement will give the rest of the world a better idea of China's appetite for gold, which will be a key factor for gold prices.

Since 2003, Western investors have poured billions of dollars into a related investment, the gold exchange-traded fund.

Gold ETFs are pegged to the price of gold, but trade like stocks.

The most active gold ETF, a Big Board-listed fund called Street Tracks Gold Shares, now holds more of the precious metal than the European Central Bank or China's central bank. (ETF shares typically represent a chunk of physical gold.)

Similar funds have been launched in Australia, Britian, the US, South Africa, Mexico, Singapore and various European countries.

Gold, often in the form of jewellery, holds a special place in many Asian and Middle Eastern investors' portfolios.

Increased wealth in these regions means more people can afford to buy on impulse.

Chinese officials have suggested their country's growing demand for commodities is a reason that its three commodity futures exchanges should play a greater role in global pricing.

Sun Zhaoxue, chairman of China Gold Association, is quoted on the Shanghai Futures Exchange's website as saying the new gold contract will "improve China's influence on the global metals market and pave the way for China to set the prices in the market".

Already, a copper-cathode contract traded at the Shanghai Futures Exchange since 1999 rivals the importance of the main copper benchmark on the 130-year-old London Metal Exchange.

However, commodity benchmarks are tough to create from scratch.

The Wall Street Journal

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By Pham-Duy Nguyen

April 2 (Bloomberg) -- Gold rose in New York for the first time in a week on speculation the dollar's rally against the euro will stall. Silver also gained.

The dollar was little changed against the euro after gaining 1.1 percent yesterday. The U.S. currency fell 7.6 percent in the first quarter, touching an all-time low against the euro, as gold gained 10 percent, reaching a record $1,033.90 an ounce on March 17.

``Gold depends on the direction of the dollar,'' said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. ``Everyone is wondering if this is the end of the dollar rebound.''

Gold futures for June delivery rose $6.20, or 0.7 percent, to $894 an ounce at 11:06 a.m. on the Comex division of the New York Mercantile Exchange.

Silver futures for May delivery rose 19.5 cents, or 1.2 percent, to $17.085 an ounce on the Comex. The price rallied 16 percent in the first quarter.

Federal Reserve Chairman Ben S. Bernanke today told Congress the economy may contract in the first half. The Fed has cut interest rates six times since September as a housing slump and a credit crisis threatened to push the economy into a recession.

``If the economy looks weaker than expected, then we're going back up with these commodities,'' Lesh said.

The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has dropped 8.4 percent from a record on Feb. 29.

Gold has climbed for seven straight years as rising commodity costs and a weaker dollar boosted demand for the precious metal as a hedge against inflation.

Inflation Accelerates

Gold rose 31 percent last year as consumer prices climbed the most since 1990 and the dollar fell 9.5 percent against the euro.

Still, the metal has tumbled 14 percent from the highest ever. Investment demand in the StreetTracks Gold Trust, the biggest exchange-traded fund backed by bullion, has fallen 3.3 percent to 642 metric tons from a record 663.8 tons on March 17.

``The bulls may attempt a push back to higher levels as the week closes out,'' said Jon Nadler, a senior analyst at Kitco Minerals & Metals Inc. in Montreal. ``There are no guarantees, however. Sentiment has been shaken and stirred across the board in commodities.''

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