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London Gold Market Report

Tue, Jul 29 2008, 12:50 GMT
by Adrian Ash

BullionVault.com

THE SPOT PRICE OF GOLD continued to hold in their tightest range for three months early Tuesday, slipping 1.1% in thin trade from an overnight high of $933 per ounce.

World stock markets fell yet again, losing 1.8% on the MSCI index of Asian-Pacific equities after Wall Street closed Monday more than 2% lower.

European bond prices rose sharply meantime as the Euro undid yesterday's rally to trade at $1.5700.

Crude oil prices ticked higher, back towards $125 per barrel.

"It is clear to see that, just as a flood of money entered the Gold Market over the summer period, the metal experienced a swift and sharp buying frenzy," notes Mitsui, the precious metals dealer in London, in its latest analysis.

"The wider happenings in global financial markets added the real impetus...As a result, the Gold Market became hugely long. And as history has taught us, this can be a dangerous game.

But with speculative betting on the Gold Price in the futures & options market already easing 4% last week, "the hugely bearish sentiment has dissipated for now" says Mitsui.

"Market direction remains unclear, but given that Gold did not break [below] $915 must be taken as positive. It needs a period of stabilization and consolidation."

Here in London today, the British Pound fell sharply on the currency markets – down almost one cent to $1.9869 – on news that the number of new UK mortgage approvals fell to a fresh record low in June.

Totaling £3.1 billion ($6.1bn), net lending secured on private homes fell by two-thirds from June 2007 to the lowest level since Oct. 2000.

Today the British government received a report from City watchdog, the Financial Services Authority (FSA), proposing amongst other options a level of tax-payer backing for the UK's mortgage-bond market.

In the United States – where government-backed enterprises (GSEs) already stand behind $5 trillion in US home loans – the Treasury called Monday for a new "covered bond" market in mortgage debt.

Mirroring the "pfandbrief" developed and traded in Germany, these covered bonds would see mortgage debt packaged up and sold onto investors. Unlike the current securitized debt markets, however, the issuing bank would continue to hold the debt on its balance-sheet by offering an explicit guarantee of the bond's value.

"The plan is designed to move more of the US mortgage market away from the government-sponsored agencies [Fannie Mae and Freddie Mac] and let banks take more of the risk," said Bill Gross – head of the world's largest bond fund, Pimco, and a major buyer of US mortgage debt – on Fox News last night.

"The guarantee comes from the banks rather than the agencies."

But can private US banks afford to extend such a guarantee? This April the Düsseldorfer Hypothekenbank – a key player in Germany's covered bond market – became the third Düsseldorf bank to need rescuing after growing its assets by 36% inside 12 months.

Today in the United States, "it's safe to safe that most larger and intermediate institutions are in need of additional capital," Gross admits.

Last night in New York, the fourth largest US investment bank, Merrill Lynch, announced a fresh write-down of its current assets worth $5.7 billion, together with a fresh sale of $8.5bn in new stock to raise cash.

The move came less than two weeks after Merrills – the largest US broker by assets – posted a $4.9 billion loss for the April to June period.

The group also reported the sale of $30.6 billion in collateralized debt obligations – "a kind of repackaged debt," as the Wall Street Journal explains – for just 22¢ on the dollar.

"Central banks continuing to aggressively reflate the economy will likely maintain pressure on currencies relative to Gold and other hard assets," says a new report from RBC Capital Markets, cited by MineWeb today.

"This backdrop is complemented by emerging market countries that are facing energy and agriculture inflation which is expected to be positive for gold.

"The seasonal slowdown for Physical Gold Demand is nearly behind us, and we expect increased demand looking ahead to August, September, and October.

"With the US Federal Reserve rate cycle on hold for the time being, the US Dollar drifting and inflation pressures growing around the world, particularly in the emerging market economies, we believe the timing is right for investors to be Buying Gold and gold equities."

Published on  Tue, Jul 29 2008, 12:51 GMT