Gold Rises for US Investors on Fresh Dollar Decline; Analysts Target $700 as Tokyo Plans for Gold ETF in Early… … 2008

SPOT GOLD PRICES moved steadily higher against the US Dollar early Tuesday, recording an AM Fix in London – the world's main gold bullion market – of $667 per ounce.

With London re-opened for business after Monday's bank holiday, the price of gold then regained last week's closing level of $668.52 by lunchtime. But the move was negated for European and Japanese investors as their currencies also rose sharply against the US Dollar.

“Given the size of [gold's] move on Friday, you wouldn't be surprised to see prices backpedaling a bit,” said Rowan Menzies of Commodity Warrants Australia to Bloomberg earlier. “[But] I don't think the fundamentals altered terribly much.”

Watching the long-term uptrend in Dollar Gold Prices that began in July 2005, “Spot Gold remained above the up trendline” last week, notes Christopher Langguth of the Technichris Corporation. “If it trades above $676.20 the weekly trend will again be up, [but] this is still a sideways market.

“As long as gold stays above the up trendline there is no reason to be short.”

On Wall Street the S&P closed 0.9% lower on Monday following the weakest data for sales of existing US homes in 15 years. The Nikkei stock index in Tokyo then dropped 0.1% by Tuesday's close, but the Shenzen index in mainland China hit a new lifetime high, more than 160% above its opening level of Jan. 2007.

Japanese gold futures contracts traded in Tokyo for delivery in June '08 dropped 0.7% against the Yen, ending the day equal to $677.19 per ounce. The British Pound spiked above $2.01, reversing an earlier gain in the Sterling price of gold above £333 per ounce. The Euro Price of Gold also pulled back after failing to breach €490 per ounce as the single currency reclaimed $1.3670, very near a two-week high.

Traders will now be watching Germany's inflation numbers, due at 15:00 BST today, for clues about the European Central Bank's next interest-rate decision. Minutes from the US Federal Reserve's latest policy meeting will be released in Washington at 17:00, followed by US crude oil inventories tomorrow (Weds) and then a slew of Japanese economic data on Thursday.

Friday will see US consumer income and spending, plus factory orders made in July. Wall Street economists expect 0.7% growth from June.

Back in Tuesday's early trade, oil prices rose and US bond prices pulled back ahead of Wednesday's $18 billion auction of two-year Treasuries, followed by Thursday's auction of $13 billion in five-year notes. Three-month US bonds fell for a sixth day, the longest stretch since January 2006.

Looking ahead in the gold market, meantime, the Tokyo Stock Exchange announced Monday that it is planning to introduce an exchange-traded gold fund early in 2008. A new legal framework will be required, as Japan's investment trust rules don't currently allow for ETFs backed by physical gold bullion.

At a gold conference in Mumbai at the weekend, “we think the price of gold will be $700-$730 an ounce by the year-end,” said Tom Pawlicki of Man Financial.

“I believe gold prices have a very real chance of touching $700 before the end of the year,” added Paul Walker, chief executive officer of the London-based GFMS consultancy.

“My view is that the groundwork is in place for a sustained rally. The outlook for traditional investments in bonds and equities is questionable. Equity prices could fall further. Part of the money will diversify from equities and fixed income into gold.”

Rajan Venkatesh, director of India bullion trading at Bank of Nova Scotia, is also bullish. “By December-end, gold prices should be $675 to $680 an ounce,” he told Reuters from the Mumbai conference.

But while leading analysts forecast higher gold prices ahead, the world's major gold-mining companies are struggling to keep a lid on their operational costs says a report from MiningMX.com.

South Africa remains the world's largest gold mining nation. But costs at three of its major gold firms – Harmony, Gold Fields and Anglogold Ashanti – are now around $450 per ounce and above. “That’s very high,” says Henk Groenewald, a portfolio manager and commodities analyst at Coronation Fund Managers.

In the United States, the cost of mining one ounce of gold has risen by 44% since 2004, driven higher by rising energy prices.

Adrian Ash
BullionVault

City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

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