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London Gold Market Report

Thu, Nov 22 2007, 14:05 GMT
by Adrian Ash

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Gold Holds Steady as Base Metals Plunge & Oil Slips on Paulson's US Home-Loan Default Warning

SPOT GOLD PRICES traded in a $4 range around $803 an ounce in London Thursday morning, as global stock markets struggled to end three weeks of losses and crude oil slipped further away from $100 per barrel.

Ahead of the long holiday weekend in the US – starting with today's New York shutdown for Thanksgiving – equity markets in Asia lost another 0.6% on average today, led down by a 2.3% loss in Hong Kong.

Japan's Nikkei index managed to add 0.3%, only its third gain in the last ten sessions, while Tokyo's Gold Market futures also added 0.3% for the session, taking the Oct. '08 contract to the equivalent of $812 per ounce.

The Gold Price in Yen has retreated almost 9% since hitting a 23-year top on Nov. 5th.
The MSCI index of Asia-Pacific shares, in contrast, has now dropped 13% of its value in Nov. so far.

Three-month bond yields in both Korea and China have fallen from 4% to 1% as investors flee for the apparent safety of fixed-income assets, regardless of consumer-price inflation rising to 7-year highs across the Far East.

Base metal prices were also hit this morning, however, after US Treasury secretary Henry Paulson said late Wednesday that the rate of home-loan defaults could prove "significantly bigger'' than first thought.

"This is not business as usual," the former Goldman Sachs executive told the Wall Street Journal. "This is an extraordinary situation."

The sharp drop in US share prices that followed was magnified by metals prices in Shanghai this morning, where zinc futures sank by 11% and trading in copper was suspended after it dropped 4% – the maximum price-change allowed by the exchange.

"London zinc futures are down over 20% since early October and are 50% off record highs touched a year ago," reports Reuters today. "Copper is now just a couple of hundred dollars above where it started the year and 25% off a record $8,800 touched in May 2006."

"This sell-off in commodities, focused on base metals, is due to the realization that they are not a good hedge against fallout from the credit market, unlike precious metals and bulk commodities," says Peter Richardson, a strategist at Craton Capital in Kew, Australia.

"The current turmoil of credit crisis, Dollar slide and Yen carry-trade unwinding has certainly added momentum to the phase of the Gold Market rally," agrees Pradeep Unni of Vision Commodities in Dubai.

"Gold could quite easily probe higher highs and even trade in four digits, but volatility may persist and could turn out to be quite normal."

As the Japanese Yen has gained more than 5% against the US Dollar so far this month – and put on nearly 12% against the high-yielding Australian Dollar.

The British Pound is now the best-paying major world currency, with UK interest rates at 5.75%. But despite bouncing against the zero-yielding Yen overnight, the Pound remains in a firm downtrend against the Japanese currency, pulling back from above ¥240 at the start of Nov. to below ¥224 at today's opening in London.

Gold Priced in British Pounds, in contrast, briefly moved above £390 for the second time this week. It recorded an all-time high above £403.50 per ounce on Nov. 7th.

The Euro, meantime, hit a new record high against the US Dollar at $1.4870 overnight.

"It could easily climb to $1.60," says Peter Bofinger, one of the German government's "Five Wise Men", in an interview with Der Spiegel. "That would eat into annual economic growth to the tune of half a percentage point" as Germany losses its competitive edge in world export markets.

"Cutting interest rates [to counter the Euro's strength] would be a useful tool, but the US would likely just sink interest rates even further, and the ECB wouldn't be able to keep up without risking inflation."

Gold Priced in Euros traded just below €542 per ounce in mid-morning London trade on Thursday, more than 2.6% above Tuesday's one-month low.

"Gold could rise to $1,000 an ounce next year, mainly because of weakness in [both] the Dollar and interest rates," reckons Alan Heap, head of Citigroup's global commodities division in Sydney.

Speaking to the Economic Times of India during the London Bullion Market Association's current gold conference in Mumbai – the annual jolly for institutional gold analysts and traders – Heap said that "the demand and supply situation in gold is extremely constrained."

Pointing to growing wealth amongst China and India's middle-classes, "if demand continues the upside in Gold Prices could remain for another 4-5 years," he added.

Indeed, China will overtake the United States as the world's second-hungriest Gold Market after India next year, said Albert Cheng – managing director of the World Gold Council's Far East division – at the LBMA conference this week.

Adrian Ash
BullionVault

Published on  Thu, Nov 22 2007, 14:07 GMT