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July 14, 2009

London Gold Market Report
by Adrian Ash

Gold Hits 1-Week High, Tied to Stocks as Goldman Earnings Boost Risk Appetite

THE PRICE OF GOLD jumped to a one-week high of $926 Tuesday lunchtime in London, ticking back with world stock markets and non-US currencies after US retail sales and producer-price inflation both showed a sharper than expected recovery.

Asian stock markets reversed Monday's 2% losses, while European shares unwound July's losses to date.

Gold Prices had already leapt 1.6% as London trade drew to a close on Monday, rising as US equities jumped 2.5% for the session after banking analyst Meredith Whitney upgraded her view of Goldman Sachs ahead of the investment bank's second-quarter earnings report.

Widely accused of rigging the financial markets and government bail-outs of the last two years to its advantage, Goldman Sachs today reported a 46% increase in year-on-year earnings, beating Wall Street expectations by almost 40%.

Today's Financial Times says Goldman executives sold $700 million worth of its stock even as the bank received $10bn in tax-payer funds between Sept. and April.

"We are going to see very good numbers not just from Goldman," said one Swiss find manager to Bloomberg this morning. "There has been such a lack of competition" in finance.

Stock-broker Charles Schwab is due to report its second-quarter earnings tomorrow (Weds), with investment-bank J.P.Morgan and fund-managers BlackRock reporting on Thursday.

Bank of America, expected to see its April-June earnings drop by two-thirds, will report before the opening bell on Friday.

"Stronger equity markets have been the main driver behind the base metals on Tuesday morning," says a note from Standard Bank's commodity team.

"Also supporting commodity prices has been a sharp fall in the VIX [volatility] index, suggesting that risk appetite is on the increase again."

Oil meantime broke back above $60 per barrel Tuesday morning, while natural gas added almost 3%.

Non-US currencies also pushed higher vs. the Dollar and Yen on Tuesday morning, taking the Euro above $1.40 and ¥130.50.

But gold rose faster still, holding above £567 an ounce for UK investors and nearing €662 for Eurozone buyers.

Across the last 40 years, Gold Prices have displayed a near-perfect non-correlation with the S&P 500 index on average. On a statistical basis, their monthly changes show a correlation coefficient of almost precisely zero.

If gold and stocks moved in lock-step, that figure would read +1.0, whilst a perfect inverse correlation would read minus one.

But moving together so far this month, however - and also breaking from their near-perfect non-correlation since Jan. 2008 - daily changes in the Gold Price now show a closer relationship with US equities than during their joint bull move of 2004-to-end-2007.

Since then, the Gold Price has added 15% for US investors. The S&P index of US stocks has lost more than one-third of its value - dropping below and staying below the price of gold for the first time in 17 years in November '08.

Over on the economic front early Tuesday, the UK Consumer-Price Index came in bang on analyst forecasts for June, rising 1.8% from a year earlier but slowing from May's 2.2% rise.

The old Retail Price Index - which also includes mortgage interest and housing costs - fell by a record 1.6% for the year as UK residential real estate lost 12.5% on the government's official data.

Eurozone and US consumer-price inflation figures for June are due on Wednesday. Today's US Retail Sales data showed a surprise 0.6% rise last month from May.

Producer Prices for US manufacturers rose 1.8% month-on-month.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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