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London Gold Market Report

Gold "Safe" from Commodities Sell-Off as US Price Deflation Hits 6-Decade Record

THE PRICE OF GOLD slipped for US and Euro investors but rose towards 3-session highs for UK buyers on Wednesday as the British Pound fell on worsening economic news.

World stock markets dropped along with commodity prices, while new US data showed Consumer Price Inflation sinking to minus 1.3% in May, the sharpest year-on-year deflation in prices since Jan. 1950.

"Gold is relatively safe from the current correction in the commodities complex because it didn't rally as much," said Wallace Ng at Fortis Bank in Hong Kong to Bloomberg earlier.

"We expect gold to trade in the $920 to $950 range in the near term, while holding on to its close relationship to the Dollar."

Using the Gold Price to try and spot currency trades, "Gold has been a very good guide recently to the direction of Euro/Dollar," says a note from Citigroup analysts, also quoted by the newswire.

"Gold has just completed a well defined head-and-shoulders top with a break of $945 that suggests a move below $900 again. Euro/Dollar is lagging, but setting up a very similar pattern with a neckline at $1.3815."

Early Wednesday the Euro retreated one cent to $1.3820, holding the Gold Price in Euros 0.5% above Monday's five-week low of €669 per ounce.

For UK investors now Ready to Buy Gold, the price bounced off yesterday's fresh 5-month lows at £567 after the official data agency reported a 12-year record in redundancies, plus a sharp fall in average earnings after accounting for inflation.

The UK division of fast-food giant McDonalds today said it's "being swamped" by some 2,200 job applications every day, including from ex-bank workers and former teachers as well as new graduates.

UK sales led McDonalds' growth of 8.4% across Europe in May.

"Are central banks like the Bank of England in a position to conclude that more, less, or the same amount of Quantitative Easing is needed?" asks Steve Barrow at Standard Bank in his G10 Daily analysis.

"We suspect its probably the same, or possibly more," he says after concluding that buying up government bonds and mortgage-debt with freshly created cash has yet to boost the broad money supply.

"Next week the Fed could switch the mix of asset purchases, perhaps buying more Treasuries and less Mortgage-Backed Securities. We certainly don't expect the Fed to plot some sort of exit strategy yet and nor the BoE.

"This could be good news for government bonds."

British gilts rose together with German bunds early Wednesday, while US Treasuries eased back but held the 10-year yield near two-week lows at 3.67%.

Crude oil retreated below $71 per barrel. Base metals and agricultural commodities also slipped.

Minutes from the Bank of England's latest policy meeting today showed the 9-member committee was unanimous in holding interest rates at 0.5% and continuing with the current £125 billion ($200bn) program of Quantitative Easing.

Economists interviewed by Bloomberg News said next Federal Reserve policy statement will restate its commitment to cheap money and bond-buying in a bid to prevent longer-term bond yields risign further.

"When equities are considered too risky, people move to corporate bonds, then to gilts, then to US Treasuries," says Mark Dampier, head of investment research at UK brokers Hargreaves Lansdown.

"When those are too risky, the only place left is gold," he tells MoneyWise magazine.

Tuesday saw the volume of Gold Bullion held to "back" the value of Gold ETFs worldwide unchanged as investors maintained their position, but the price "certainly seems to be stuck in the doldrums at the moment," says Darren Heathcote at Investec Australia, speaking to Reuters.

"I think ultimately, unless we see some kind of negative fallout again from the financial sector, the hopes are good for a continued recovery in metal prices and gold to benefit further."

Today the Obama administration in Washington unveiled detailed and sweeping proposals for new regulations right across the banking and retail finance sector.

Here in London, tonight's annual Mansion House speech by chancellor Alistair Darling will warn bankers that "Anyone who thinks that we can carry on as if nothing has happened should think again."

The New Labour administration took banking over-sight away from the Bank of England in 1997, putting the newly-created "principles based" oversight of the Financial Services Authority (FSA) in its place.

"Having gone too far in deregulating, which contributed to the current crisis," writes hedge-fund speculator George Soros in today's Financial Times, "we must resist the temptation to go too far in the opposite direction.

"While markets are imperfect, regulators are even more so. Not only are they human, they are also bureaucratic and subject to political influences, therefore regulations should be kept to a minimum."

 

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