Gold Drops 2% from Post-Bear Stearns High as Bush Talks Up

Gold Drops 2% from Post-Bear Stearns High as Bush Talks Up "Strong" Dollar

PHYSICAL GOLD BULLION PRICES fell hard in Asia and London early on Monday, dropping almost 2% from Friday's 15-week closing high – their best level since peaking above $1,000 per ounce as the Federal Reserve stepped in to rescue Bear Stearns in mid-March.

Crude oil futures dropped more than 1.5% to dip below $143 per barrel, almost 2.3% below the most record high, hit last Thursday.

Global equity markets ticked higher, meantime, delivering the third gain in 10 trading sessions for the German Dax, while the US Dollar rose against all other major world currencies.

"The dominant drivers of the market last week were the oil price and the Euro," notes the team at Mitsui, the precious metals dealer, here in London today.

"Both are lower this morning [as] the US Dollar has continued to strengthen. All the precious metals are under pressure."

In Gold, the Mitsui team believes, "the next level of support will be the 100-day moving average at $915 per ounce."

Raw materials sank alongside the Gold Price this morning, dragging the Goldman Sachs Commodity Index (GSCI) more than 1.8% lower on falling energy, food and base metal prices.

The US Dollar rose to a 10-session high vs. the Yen and knocked almost 1% off the British Pound after US president George W.Bush – speaking before the G8 political summit begins in northern Japan – responded to a question about possible government intervention in the currency market by claiming that "the United States believes in a strong Dollar policy."

"The relative strength of our economy will be reflected in currencies," he said when pushed.

Current US interest rates sit fully 2.0% below the latest reading of US inflation. (How will Sub-Zero Real Interest Rates Affect Gold? Get your detailed Gold Report PDF here...)

Here in London, and ahead of this Thursday's interest-rate decision from the Bank of England, the UK today reported a 1.6% drop in industrial output for the year to May. German industrial production shrank even faster that month, the official data agency later confirmed, down by 2.4% from April.

Both UK and German government bond prices rose on the news, pushing two-year bund yields down to 4.31%. Yet the Euro managed to bounce after losing 2% against the Dollar since Thursday, recovering from its lowest level against the Dollar since June 25th at $1.5610.

The Gold Price in Euros fell 1.2% and help above €587 per ounce.

"The Euro is a bit weaker, the Dollar is stronger and the oil price is slipping a bit," noted Eugen Weinberg, an analyst at Commerzbank, to Bloomberg earlier.

"But also we are seeing that the equity markets are in better shape [and] there has been a strong negative correlation between the Gold Price and the equity markets.

"Risk aversion has led to an inflow into Gold, so higher equity markets could see a lower price."

Today's survey of professional gold analysts and traders by the newswire, in contrast, saw 26 out of 42 recommend Buying Gold.

Five were neutral and 11 advised selling the metal.

Hedge funds and other large speculators trading the US gold futures market grew their bullish position substantially last week according to the latest CFTC data. But they grew their "short" positions faster still, reducing the overall increase in their net bullishness to just 2,348 contracts out of a total of 16,814 opened.

Including the traditionally bearish camp of commercial traders, as well as the perpetually bullish small speculators – meaning private individuals – open interest grew by 2.7% to a four-week high of 401,226 contracts.

Open interest in US crude oil futures, in contrast – now the subject of intense political pressure as "Evil Speculators" are blamed for the 625% increase in prices since 2002 – fell yet again, down by 2.2% to a new 15-month low of 1.3 million.

Adrian Ash
BullionVault