By Chris Flood
Financial Times
Tuesday, October 6, 2009
Gold prices hit a new record above $1,036 an ounce on Tuesday as the dollar lost ground following reports that the US currency’s critical role in global oil trading was coming under scrutiny.
Gold reached a record $1,036.40, racing past its previous peak of $1,030.80 set last March when Bear Stearns, the US investment bank ran into trouble.
The catalyst was a report in The Independent newspaper in London that Gulf Arab states, along with China, Russia, Japan and France, had held secret meetings to consider using a basket of currencies to trade oil instead of the US dollar.
The report was denied by Saudi Arabia’s central bank and a Kuwaiti minister said there weren’t any negotiations, according to Reuters. Top officials from Russia, speaking on the sidelines of the IMF meeting in Istanbul, also denied the report, the news agency said.
Analysts were also sceptical.
“This speculation appears to have no foundation whatsoever, nor does it even make much sense, but it certainly plays well with the gold bugs” said Julian Jessop, chief international economist at Capital Economics.
Commerzbank said: “From an economic point of view the plan would be completely nonsensical.” They pointed out that traders would try to avoid the transaction costs that introducing a basket of currencies for oil trading would entail.
“Who would be in a position to set the weighting of such a synthetic ‘oil trading currency’ in a binding way?” they asked.
“Gold has garnered strength several times this year every time the dollar’s role as the world’s reserve currency comes under question,” said James Steel, precious metals analyst at HSBC: “If the USD remains on the defensive gold could maintain prices even at these high levels.”
Mr Steel said that it was particularly striking that the gold market had held up well considering that both Russia and Saudi Arabia had denied the report that they were in discussions with the Gulf States to replace the pricing of oil in dollars with a basket of currencies.
“Although not the sole driver, the dollar has once again played a pivotal part, and we believe currency movements are likely to remain crucial in setting the tone of trading for gold,” said Suki Cooper of Barclays Capital.
Ms Cooper said that although strong investment demand had been more than sufficient to offset a slowdown in jewellery demand, but investor buying would need to expand further to propel prices higher.
However, analysts continue to warn that the long position (bets on prices rising) held by speculators remains close to record levels, leaving the market vulnerable to a correction if the dollar managed to recover.
The latest data from the Commodity Futures Trading Commission showed that the speculative net long position fell for the first time in five weeks, down 2.2 per cent to 231,386 lots in the week ending September 29 from a record 236,749 lots in the previous week.
Gold’s advance lifted other precious metals with silver up 3.3 per cent to $17.14 a troy ounce while platinum added 1 per cent at $1,306 a troy ounce and palladium hit the $300 a troy ounce mark, up 0.5 per cent.
Crude oil prices also moved higher as the dollar weakened.
Nymex November West Texas Intermediate rose $1 to $71.41 before slipping back to trade 84 cents higher at $71.25.
ICE November Brent reached a session high of $69.20 before easing back to trade 80 cents higher at $68.84 a barrel.
Cocoa prices dipped after a sharp jump in the previous session. Liffe March cocoa fell 1.3 per cent to £2,125 a tonne after jumping 7.2 per cent in the previous session.
ICE December cocoa eased 1.2 per cent to $3,202 a tonne after surging 8 per cent in the previous session.
The extent of Monday’s jump, which saw the ICE contract surge $195 in the space of a minute, took even seasoned traders by surprise.
Traders at Sucden said substantial stop-loss positions that had been opened on Friday when the market was moving lower were exposed and had to be closed.
“Who knows where this market can go?” said one trader, adding that until there was more selling by cocoa producers, any kind of ceiling for the market above current levels could prove tentative.
Dealers remain concerned that the market could face a supply deficit for a fourth successive year as yields from ageing cocoa trees in the Ivory Coast have been affected by disease.
Among base metals, copper rose 1 per cent to $6,062.5 a tonne while aluminium added 1.6 per cent to $1,834 a tonne.
SOURCE: http://www.ft.com/cms/s/0/60d5e290-b25f-11de-bbaf-00144feab49a.html