Gold #11 – How Come Gold is Going Nowhere?

The article from Bloomberg a few days ago is interesting because it is asking why the gold price is not moving. Things to add to this article are: 1) the yen has moved up against the dollar, which depresses the yen carry trade, a large source of funding in the commodity markets and 2) recently the dollar has moved up against the euro because dollars are in demand so investors can unwind their bond positions.

Dollar-priced bullion, a traditional haven for investors in times of turmoil, is lagging behind U.S. Treasuries. The metal is stuck at about $670 an ounce in London, up less than 1 percent since July 16, when stocks started to tumble.

It should be the best of times for investors in the metal. The dollar has weakened 3.4 percent against the euro this year. The Federal Reserve says inflation remains the ``predominant risk'' to the economy. Commodity prices, as measured by the UBS Bloomberg CMCI index, are heading for a sixth straight annual gain. The supply of gold is falling for the third time in four years, and global stock investors lost as much as $2.66 trillion in the most volatile trading since 2003.

Investors' optimism is waning because central banks in Europe have increased sales of reserves this year by 7.3 percent, or 24.5 more tons valued at $581 million, data from the London-based World Gold Council show. The world's central banks are the biggest holders of gold, controlling about a fifth of all known supplies.

The European banks have sold 358 metric tons of the 500 tons permitted annually, compared with 333.5 tons through Aug. 11 last year, the council said. Banco de Espana has sold 149 tons in the current year, more than double the sales in the previous two, says London-based research firm GFMS Ltd.

Rising global interest rates have made holding gold less attractive for foreign investors. While the Fed has kept rates unchanged at 5.25 percent since June 2006, the European Central Bank has raised rates twice this year to 4 percent and the Bank of England made four increases to 5.75 percent. Gold priced in euros is up 3 percent this year.