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London Gold Market Report

Tue, Jul 15 2008, 12:14 GMT
by Adrian Ash

BullionVault.com

Gold Makes It Five-in-Five as Equities Sink, Inflation Jumps & Dollar Hits Fresh All-Time Low

THE SPOT PRICE OF GOLD jumped for the fifth session running in London on Tuesday, adding 1.2% against the US Dollar as crude oil broke back above $146 per barrel.

European shares meantime slid to a three-year low, losing 2.2% in Frankfurt as the US currency sank 1% to a new all-time low vs. the Euro.

Here in the UK, new data showed consumer prices rising at their fastest pace in 16 years – almost twice the government's target – forcing a surge in the value of Sterling above $2.01, a new 13-week high.

Bond yields fell worldwide however, as investors fled equities for fixed-income assets regardless of sub-zero returns.

Dow Jones futures fell below 11,000 for the first time in two years.

"Gold continues to trade bullishly," says today's Gold Market note from Scotia Mocatta, and "the focus remains to the topside.

"Only a close back below $946 will turn our view neutral."

French, German and Italian investors wanting to Buy Gold today saw the price move 5% higher from this time last week to break fresh 16-week highs above €615 per ounce.

In Tokyo the Gold Price leapt to a fresh 25-year high while the Nikkei stock market lost 2.1% and financial stocks the world over "took a beating," as Mitsui puts it, "over fears about exposure to the US financial sector – specifically Fannie Mae and Freddie Mac."

Chinese stocks fell 4.2% in Hong Kong and dropped 3% in Shanghai.

The two biggest banks in Singapore today felt it necessary to deny any "material" exposure to the US government-backed home lenders.

"The price of gold has responded appropriately to the very real tone of risk aversion that continues to engulf the wider financial markets," Mitsui goes on.

"Gold investment is once again attracting the attention of the wider financial community and as the fallout from the Fannie Mae and Freddy Mac crisis escalates, this action should prompt a further pouring of money into the yellow metal.

"Gold's test of $1,000 is but a short distance away and a breakthrough of the previous high of $1,030 has a very real chance of becoming reality."

Three days after taking IndyMac into receivership – the third largest banking failure in US history – the new manager, John Bovenzi of the FDIC, said last night that it's "as safe and as sound as any bank in the country right now."

Given that he also thinks further failures likely, that's hardly reassuring.

"It's the cockroach theory," said one hedge fund manager to Reuters earlier. "You don't just have one bank failure – when you have a big bank go under, there's always more than one."

"Fannie Mae and Freddie Mac are clearly not Bear Stearns," counters James Steel, metals analyst at HSBC in London, "as they have the implicit backing of the US government.

"Nonetheless, the situation looks uncertain enough to encourage enough investor safe haven buying in bullion to support Gold."

Following a record 30% rise in manufacturing prices in the year-to-June, the largest contribution to last month's jump in UK consumer inflation came from food and non-alcoholic drinks, the Office for National Statistics said this morning.

Yet still bond prices rose, pushing two-year yields almost five basis-points lower to 4.86%, while the FTSE100 share index sank 2.3%.

Tomorrow brings the latest inflation data for both US and Eurozone consumers – also forecast at fresh 16-year highs – after Tuesday's release of Producer Price data in the United States.

Published on  Tue, Jul 15 2008, 12:15 GMT