Daily gold report: Wednesday 25th July

Spot gold prices fell below $680 for the first time in four sessions early Wednesday, sinking 1.3% from Tuesday's peak to dip beneath $677 per ounce the current trendline of the rally starting in late June.

The severe pullback in gold only came for US investors, however, as the US Dollar bounced hard from a near record-low on its trade-weighted index. Knocking nearly one cent off the Euro inside three hours and coming on the back of no economic data whatsoever the Dollar's sharp rally kept the Euro Price of Gold in a tight range around €493 per ounce.

The British Pound meantime retreated below $2.0520, nearly 1.5 off its latest 26-year high. That capped Wednesday's early losses for British gold investors at 0.7% from the overnight peak, with gold priced in Sterling recording a London Morning Fix of £330.01 per ounce.

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'The US Dollar has fallen hard and is already bouncing a bit,' said Rowan Menzies of Commodity Warrants Australia to Bloomberg earlier today. 'The magnitude of that bounce will determine how far gold and silver fall.'

Bucking the sudden gains in the US Dollar, however, the Japanese Yen has now recovered 2% of its value over the last week, moving from 122.50 per Dollar to less than 120.00 overnight in Tokyo an 11-week high.

This bounce in the Yen, perhaps led by Japanese citizens covering their record short position in the currency, helped pushed gold futures at the Tocom some 0.4% lower overnight, down to the equivalent of $688.40 per ounce.

Japanese government bond prices today hit a seven-week high as the Nikkei stock index fell 0.8% to a six-week low. The price of credit default swaps, reports the Financial Times, climbed to their highest level this year, proving that risk-aversion sparked by the collapse of Bear Stearns' mortgage-bond hedge funds has now spread to Japanese fund managers.

'Japan's nine largest banks currently hold more than 1 trillion ($8.3bn) in products backed by US subprime mortgages,' notes today's technical gold report from Standard Bank in Johannesburg. 'That could see the USD suffer even more pressure on the downside should the market's worst fears be realized.'

Worst fears over the extent of 'subprime contagion' were confirmed Tuesday by Countrywide Financial, the largest mortgage lender in the United States. Reporting a 33% decline in its April-to-June earnings and adding that 'we expect difficult housing and mortgage market conditions to persist' in the second half of 2007 it admitted that defaults on the lowest-rated loans have now spread to its prime loan book.

'If gold breaches $690 an ounce then it is likely to go ahead,' said Bhargava Vaidya, a bullion consultant in Mumbai, to the Economic Times of India overnight. 'However, I believe gold may retreat from the current levels in the next week.'

Open interest on the MCX gold futures exchange has fallen sharply, reports the paper, suggesting that Indian investors are covering their short positions in gold. Indeed, 'the continuing strength of the Rupee this week has lead to pockets of demand out of India in recent days,' says the latest Mitsui Refining Monitor.

'In the current bullish trending market, we expect that physical gold demand will tail off and re-emerge in the latter half of Q3, but buyers will be standing by for any dips.'

Adrian Ash is editor of Gold News and head of research at www.BullionVault.com