SPOT GOLD PRICES sank at the start of London trade on Monday, adding to Friday's sharp losses and dropping $12 per ounce from an overnight rally in Asia to fall below $900 for the first time in seven sessions.

As the wave of sell orders pushed physical Gold Bullion as low as $897.20 before a rebound to $903, world stock markets continued Friday's rally, pushing Europe's 300 largest blue-chips some 0.9% higher by lunchtime in Frankfurt.

"The Gold Market is still very much driven by speculation, so when liquidation comes in, it can be quite frightening," noted a Singapore dealer to Reuters earlier.

He pegged short-term support at $880 – the same level picked by Wolfgang Wrzesniok-Rossbach, chief metals trader at the Heraeus refining group in his latest Precious Metals Weekly.

Overall, "we see no quick fix to the [bullish] situation," says Wrzesniok-Rossbach, citing the on-going crisis in South African gold production, as well as falling central bank gold sales and the US Fed's gold-friendly interest rate cuts of last week.

But "the risk of a set-back has been mounting as a result of the recent, massive gains."

Tocom gold futures for Dec. '08 today closed 1.4% lower at the equivalent of $916 per ounce, while the Nikkei 225 stock index rose 2.7% to hit a two-week high. Yahoo Japan gained 9.5% in response to Microsoft's $43 billion bid for the search-engine's US parent.

Hong Kong shares gained almost 4%, meantime, buoyed by news that Beijing will indeed allow new equity mutual funds to float on the Chinese mainland.

The $4 billion IPO of China Railway Construction Corp. was also postponed, pushing money into existing issues.

"Another underlying impetus for the gains is the lack of bad news – for now – related to subprime problems," said Soichiro Monji, chief equity strategist at Daiwa SB to Reuters.

On the currency markets the Euro today retreated towards Friday's lows at $1.4800, but for French, German and Italian investors Buying Gold, the price touched an eight-session low this morning of €606 per ounce – almost 4% beneath last week's new all-time record highs.

The British Pound recovered half of Friday's three-cent plunge vs. the Dollar to trade above $1.9760. That helped to push the Gold Price in Sterling down below £454 per ounce for the first time since Jan. 23rd.

Crude oil held steady at $89 per barrel after the Opec cartel agreed yesterday not to increase output. Coal prices at the Newcastle terminal in Australia meantime leapt by one-quarter today from last Monday's rate, breaching $116 per tonne as flooding in Queensland, snow-storms in China and the on-going power outage in South Africa curbed global supplies.

South Africa's state-owned power monopoly, Eskom, says it has restored 90% of electricity supplies to the industrial customers in the world's No.2 gold-producing nation. But it still faces a shortfall of between 1,000 and 1,500 mega-watts, and the "probability of load-shedding [i.e. shutdowns] is high," according to a spokesman.

Xstrata became the first mining company to declare force majeure on Friday, suspending shipments of ferrochrome and vanadium – both crucial to steel production.

Also on Friday, GoldFields Mining – the world's fourth-largest gold company – warned that the 90% energy cap threatened six of its 21 mine shafts with closure.

"I must stress this is a very serious situation," said CEO Ian Cockerill. He forecasts a 20-25% drop in first quarter output if power supplies remain at 90% or below.

Government bonds fell this morning alongside Gold Prices as world equities rose early on, forcing the yield on 10-year German bunds lower for the first session in three. Ten-year US Treasuries yielded 3.61% by 11:00 in London – nearly one-third of a per cent above the four-and-a-half-year lows seen two weeks ago.

But that was still way below the last recorded rate of US consumer-price inflation at 4.1% per year.

"Bonds are at the mercy of what's going on in equity markets," reckons Charles Diebel at Nomura International. "As they rebound we're seeing some of the safe-haven support [for bond prices] evaporate, but only until the next negative headline."

Russia's central bank today raised its key lending rate to 10.25%, warning that if it ignores inflation, it "won't be able to provide strong growth for the economy."

Adrian Ash

BullionVault

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Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, 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 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

-- Posted Monday, 4 February 2008 | Digg This Article