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London Gold Market Report

Tue, Dec 2 2008, 12:34 GMT
by Adrian Ash

BullionVault.com

Gold & Stocks Bounce as Dollar, Yen Stall; "Be Your Own Central Bank" as Global Economy "Implodes"

THE SPOT PRICE OF PHYSICAL GOLD bounced $13 per ounce from a new 7-session low early Tuesday, while world stock markets found their floor almost 15% below the start of last month.

Recording an AM Gold Fix here in London of $772.50, the Gold Price stood 5% below last week's peaks vs. the Dollar and Euro as well as Sterling.

The Nikkei stock index in Tokyo meantime closed 6.3% lower after Wall Street's S&P dropped 9% on Monday. European stocks then reversed an early 2% loss to trade higher by lunchtime.

The Japanese Yen reversed one-third of its destructive surge so far this week on the forex markets.

"[Gold last week made] a nice bounce off resistance at the old, and very significant, $835 level," notes Phil Smith today for Reuters India Technicals.

"This was the peak hit in 1980 on a combination of high inflation linked to oil prices, the Soviet invasion of Afghanistan, and the impact of the Iranian revolution."

Today crude oil briefly dipped below a three-year low at $48 per barrel, while anti-government protesters in Thailand agreed to end their sit-in at Bangkok airport.

Pakistan was asked by the Indian government to extradite 20 terror suspects possibly connected with last week's attacks in Mumbai, which left 188 dead.

The Indian Rupee bounced 1.2% against the US Dollar on the currency markets, but remained more than one-fifth lower from the start of 2008.

Spot Gold prices quoted by Axis Bank in Mumbai dipped to INR 12,443 per 10 grams, while the Bombay Bullion Association reported a sharp drop in Indian gold imports during November, down 26% from the same month in 2007 at 40 tonnes.

"There were no imports or trading in the last four days of the month because of the terrorist attacks," said BBA president Suresh Hundia to Reuters.

Here in London, both the Euro and Sterling turned higher vs. the Dollar after hitting their worst levels since Nov. 23rd at $1.2560 and $1.4780 respectively.

That capped the Gold Price in Sterling at £524 an ounce. French, German and Italian investors looking to Buy Gold today saw it rally to €614.

"Ongoing volatility could put precious metals under more strain today," says Manqoba Madinane at Standard Bank in Johannesburg, blaming the sell-off so far on "fund liquidation amid increased investor uncertainty."

The flight-to-cash continued in government bond markets, meantime, driving the yield on 5-year UK gilts down through 3.0% for the first time ever, almost halving from June.
Ten-year US Treasury yields made a fresh all-time low at 2.70%. Inflation in US consumer prices was last pegged at 3.70% per year.

"The most precious asset going forwards will still be Gold," says Marc Faber, Thai-based Swiss fund manager – and publisher of the Gloom, Boom & Doom Report – speaking to Bloomberg.

"I only buy physical gold, because I don't trust derivative products, I don't trust ETFs, and I advise every American to hold his gold outside the United States.

"At some point, between January and March next year, you have to get out [of equities and exchange-traded commodity trusts]. The global economy is imploding – I repeat, imploding – and there's not going to be a recovery despite all the government intervention.

"In their insanity, central banks have become money printers. So you have to become your own central bank. You cannot trust central banks any more."

Today the Reserve Bank of Australia (RBA) slashed its key lending rate by a full 1% to 4.25%, saying that "global inflation will moderate significantly in 2009."

But the move risks a drop in the Aussie Dollar back to 2003 levels at US$0.60 according to analysis from Calyon Bank.

The Gold Price in Australian Dollars has gained 25% so far this year.

To the north-north-west in Tokyo today, an emergency meeting at the Bank of Japan left Yen interest rates on hold at 0.30%, but governor Masaaki Shirakawa promised a further ¥3 trillion ($32bn) of lending to private banks.

The Japanese central bank will also take lower grades of corporate debt as collateral against its loans – accepting BBB as well as A-rated or better – as well as offering "an unlimited amount" of short-term banks loans to maintain cash liquidity over the New Year's holidays.

The cost of insuring Japanese corporate debt against default rose further overnight. The i-Traxx index of insuring high-yield European bonds touched a new record high at 9.34% per year.

"In the worst case, the [European] recession will last as long as four years," says Tom Kirchmaier, a visiting fellow at the London School of Economics. "Then it would take the markets and the real economy a while to fully recover.

"It could take governments up to 10 years to sell their bank shares."

Sweden's Riksbank will meet two weeks early and set December's interest rate this Thursday – coinciding with widely expected interest-rate cuts from the Bank of England in London and the European Central Bank in Frankfurt.

And meantime in the United States, Fed chairman Ben Bernanke – saying that the failure of Lehman Brothers was "unavoidable...given the legal constraints [and] regulatory framework" in place when it failed in Sept. – spoke on Monday of "purchasing longer-term Treasury or agency securities on the open market in substantial quantities."

This approach – variously known as 'quantatitive easing', 'monetization' or just plain 'inflation' depending on your central-bank paygrade – "might influence the yields on these securities, thus helping to spur aggregate demand," said Bernanke.

Published on  Tue, Dec 2 2008, 12:34 GMT

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