08:25 EST, Mon 13 July

Gold Set to "Test $900" as Banks See "No Reason to Buy", Speculators Trim Position

THE PRICE OF PHYSICAL GOLD reversed an early $4 drop on Monday morning in London, recovering last week's finish at $913 an ounce as Asian stock markets ended the day sharply lower but European equities ticked higher.

Priced in Euros, gold bounced higher from a new 3-month low of €651.30. US crude oil contracts held below $60 per barrel.

"A test of $900 an ounce in Gold is on the cards in the near future," reckons UBS metals strategist John Reade in London, citing low jewelry demand, falling Gold Coin sales, and a lack of new inflows to trust-based gold ETFs.

New data released on Friday by US regulator the CFTC - which also confirmed it wants to set position limits on gold derivative traders, alongside 'anti-speculation' caps on oil and grain dealing - showed hedge funds and other large speculative players cut both their bullish and bearish bets on the Gold Price last week.

Overall, that left professional speculators' net long position in Gold Futures and options little changed, standing more than a third above its 5-year average at the equivalent of 532 tonnes.

The SPDR listed in New York meantime shed 10 tonnes of Gold Bullion last week, taking the volume of gold used to back its ETF shares just below 1,110 tonnes.

"There are fewer and fewer reasons to Buy Gold," says fund manager Tetsu Emori at Astmax Co. in Tokyo, speaking to Reuters today.

"Those investors who helped push up the market are now done with buying, and there is little need to turn to gold as the Dollar is preferred as a safe haven," he said.

Today the Dollar slipped towards $1.40 per Euro and dropped to ¥91.75 - its lowest level against the Japanese Yen since February's 24-year lows.

US Treasury bonds continued to rise in price, however, pushing the yield offered by 10-year debt to 3.29%, a two-month low that's sharply down from June's 4.0% peak.

Japanese, UK and German government debt prices also rose early Monday, pushing 10-year German bunds down to 3.25% after European Central Bank president Jean-Claude Trichet told a conference in Munich that the Eurozone economy will only slow its rate of contraction in 2009.

Forecasting a return to growth by the middle of 2010, Trichet added that the ECB's monetary tools are "up to the challenge".

The ECB has been accused of doing too little, too late, despite pumping record sums into Eurosystem banks since the crisis broke two years ago next month.

"Gold at 913 [completed] its 5th down week out of the last 6 sessions," says technical analysis from London dealers Scotia Mocatta.

"This move started up at 990 and risks falling to 865 in the current bearish environment."

The Gold Price in British Pounds today rose 1.7% from Friday's new 5-month lows. For Australian buyers, the price has risen in each of the last five weeks.

But studying the US-Dollar Gold Price, "A failure of the 912.75 support is favored," says Karen Jones at Commerzbank in London, "and will target 894.50 en route to the 865 April 2009 low."

That level also represents "the monthly close barrier to a more protracted 844.25/806.08 decline," she tells clients.

Also studying technical charts, the Euro may fall back vs. the Dollar says new analysis from Ralf Umlauf, head of floor trading at the €185bn Helaba Landesbank Hessen-Thueringen in Frankfurt.

"A weaker trend has recently emerged within a broad sideways range," Umlauf is quoted by Bloomberg, and the Euro "remains in sell mode."

Typically moving in the same direction as the Euro/Dollar exchange rate since the single currency was launched 10 years ago, the Gold Price in Dollars has dropped 2.5% so far this month. The Euro has slipped only 0.5%.

On a statistical basis, the correlation between Gold and the Euro when priced in Dollars has averaged +0.50 since the start of 2000. But between mid-Jan and May this year, that relationship went negative, with Gold rising as the Euro fell.

Over the last fortnight the daily correlation between Gold and Euros has eased back again, falling from June's average of +0.90 to +0.31 on Friday.