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Is Gold Pointing to Lehman Mark II?

Thursday, 29 Jul 2010 | 4:36 AM ET

Gold and oil prices are flashing warning signals that this summer may look more like the summer before the collapse of Lehman Brothers than the one that preceded the onset of the crisis in 2007, according to Simon Derrick, head of currency research at Bank of New York Mellon.

AP

"The leading indicator of investor sentiment in both 2007 and 2008 was the price of gold," Derrick wrote in recent research.

In mid-August 2007, gold stood at a "relatively modest" $650 a troy once. But, after the Federal Reserve's aggressive rate cutting later that month, it began a rally that saw it add 58 percent to its price by March 2008, he added. Gold hit its peak price of $1030 on March 17 2008, Derrick said.

Oil prices continued to rally into the summer of 2008 despite losses for gold, which stood at $680 in October 08, just a month after the collapse of Lehman Brothers.

"In light of this we find the recent weakness seen in the price of gold particularly telling," Derrick wrote.

"Although it is tempting to say that much of the 7.7 percent slide seen in the price since June 21st has been driven by the supposed rehabilitation of the euro as a credible store of value, this doesn’t really fit with the available facts," according to Derrick.

He believes it is telling that with the exception of June 21st, the day that China changed its currency policy, falls in the price of gold have come after the publication of uninspiring US economic data.

"The current decline in the price is down to deterioration in sentiment about the economic outlook (and the threat of rising deflationary pressures) rather than a reflection of greater optimism about the standing of the euro," Derrick wrote.

Demand for gold from India fell by 30 percent last year and could fall by as much as 40 percent next year if the Bombay Bullion Association is to be believed, Derrick said.

"All this comes at a time when the technical picture for gold is sending some very clear warning signals. Most notably, a series of lower highs on our favored momentum indicator since the fourth quarter of last year speaks of a longer term trend that is looking increasingly tired," he added.

"With the oil price flashing a similar warning, it seems we are getting closer to answering the question whether this feels more like the summer of 2008 or that of 2007. On the basis of the current evidence it seems like July of 2008 provides a better fit," Derrick wrote.