Gold upbeat as investors rush for safety, dollar strength ignored

Sept. 29, 2008
By Clara Denina

London, 29 September 2008 - Gold kept rising on Monday afternoon, ignoring dollar gains and plunging oil, in a broad-based flight to safety assets in the current environment of financial market turbulence, after investors gave an unexpected cool reception to the US government $700 billion bailout plan.

Meanwhile, palladium fell to yet another three-year low of $206 an ounce on worries about the downturn in the automotive sector, especially in Asia.

Spot gold rose as much as $28.95, or 3.3 percent to an intraday high of $907.60 an ounce, before settling again below the key $900 level at $888.00/888.50 an ounce, still up $16.20.

"People are really looking for safe haven in the current banking turmoil ...that’s the main we’ve seen gold briefly jumping above $900," Dan Smith, analyst at Standard Chartered, said.

"This year's CBGA sales, which will be around 360 tonnes, some 28 percent lower than the annual quota of 500 tonnes, are an example that even central banks are worried about the financial turmoil and they prefer to hold on to something rather than sell their gold reserves," he added.

The fourth year of the Central Bank Gold Agreement (CBGA) drew to a close on Friday and sales by its 16 signatories are widely expected to sharply plunge from last year’s sales of 475.8 tonnes - under the second CBGA signed in 2004, members can sell up to 500 tonnes of gold each year until 2009.

Market sentiment today remained closely linked to developments in the financial sector and in particular progress of the US government $700 billion bail-out plan, where Congressional oversight is to be ramped up, amid extra protection for taxpayers and a clamp down on the pay of executives responsible for a failed banking enterprise.

Consequently, gold ignored currency movements -- the dollar remained upbeat versus the euro and a basket of other main currencies, despite the collapse of another financial institution -- the heavily debt-ridden Wachovia has been bought out by Citigroup for about $2.2 billion.

Meanwhile, crude oil fell more than $7 on Monday, slipping below $100 a barrel on a stronger dollar and the credit and financial turmoil spreading to Europe, fuelling concerns about an economic slowdown curbing demand. Gold, usually seen as an hedge against oil-led inflation, has recently detached from movements in oil, as this returned to a more supply-driven market leaving gold to follow wider financial markets.

Today’s gold gains were also encouraged by bullish views coming from the ongoing LBMA and LPPM conference in Kyoto, Japan, where analysts predict further upside momentum for the gold price over the next few weeks, as current dollar strength is not here to stay and demand from investors craving for red-hot assets like gold will increase.

In other precious metals, palladium fell to a new three-year low of $208 an ounce at one point, on worries about the downturn in the automotive sector after news that Japanese automaker Toyota Motor Corp. has begun cutting production in China, where auto demand started to show signs of weakening. Toyota has also been reducing production in such countries as the US, UK and Poland, amid a global economic slowdown. It then settled at $214/218 an ounce, still down $7.

This came just before figures on auto and truck sales for September in the US tomorrow, where decreased credit availability is expected to have continued to constrain sales.

Elsewhere, platinum showed more resilience, up $4 to $1,096/1,102 an ounce, but silver also fell 18 cents to $12.97/12.99 an ounce, undermined by a ten-month low of $6,440 a tonne seen in the copper price -- silver is a by-product of the red metal.

The Bullion Desk

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