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London Gold Market Report

Wed, Sep 17 2008, 13:29 GMT
by Adrian Ash

BullionVault.com

THE PRICE OF PHYSICAL GOLD stuck to non-Dollar currencies early Wednesday, holding in the middle of this week's range as the US nationalization of AIG – the world's largest insurance group – whipped world stock markets.

The Japanese Nikkei added 1.2% after the Federal Reserve seized four-fifths of the failed insurance giant for $85 billion, but Shanghai shares closed 3.6% lower.

Germany's Dax index rose 0.8%, but trading on Russia's RTS exchange was suspended for the second day running after shares lost 6.4%.

Here in London, the FTSE100 recovered from a sharp 2% drop on news of a likely take-over by Lloyds TSB – "which has come through the credit crunch in better shape than many of its rivals," as the Financial Times notes – of the UK's No.1 mortgage lender, HBOS.

"With CDX credit spreads continuing to widen," notes Manqoba Madinane at Standard Bank, "market systemic risks should provide support [for Gold] on the downside."

He pegs "primary support" for gold at $772. The London Gold Fix came in this morning at $785.50 an ounce, it best level since Tuesday last week.

On the forex market the Euro ticked back above $1.42, while Sterling touched $1.79, leaving the Gold Price for European investors unchanged from this time last week.

Crude oil bounced almost 3% to $93.80 per barrel ahead of today's US stockpile inventory report – expected to show a sharp drawdown following Hurricane Ike – while industrial metals fell across the board.

Platinum and palladium prices continued to slip after worse-than-expected European trade data, compounded by forecasts of a German slowdown from both Chancellor Angela Merkel and Euro-finance chief Jean-Claude Juncker.

The London Metal Exchange today asked traders using Lehman Bros., the failed US bank, to declare their unsettled base-metal deals by Dec. 17th.

In exchange-traded trust funds, meantime, the crucial DJ-AIG commodity index – which offers to mimic hard-asset ownership by tracking some $30bn in commodity futures, swaps and options – slid 4.2% in Frankfurt, even after trading resumed in exchange-traded commodity funds backed by the newly-nationalized insurance giant.

London banks and brokers ceased making a market in AIG-backed commodity notes on Tuesday, fearing a collapse of their ultimate counterparty.

"Investors in commodity indices were increasingly aware that they did not own hard assets but a swap on an index of commodity futures with counterparty risk," said John Reade, metals analyst at UBS, to the Financial Times.

"AIG commodity bankers declined to comment," the paper reports.

According to ETF Securities – the London-based trust group behind such "securitized" commodity products as the gold exchange-traded funds – American Insurance Group stands as counterparty in some $2 billion-worth of DJ-AIG contracts.

AIG also insures more than $300bn worth of finance company bonds. Hank Calenti at RBC Capital Markets put the potential market impact of AIG failing at more than $180 billion.

Over one billion shares in AIG changed hands on Tuesday, four times the average volume.

Pre-market Wednesday, AIG stock fell a further 20% to $3.00, down some 95% since Sept. last year.

"They pretended they were drawing a line in the sand with Lehman Brothers but now two days later they're doing another bailout," said Nouriel Roubini, economics professor at NYU's Stern School of Business, overnight.

Add the $85 billion rescue of AIG to the aid given J.P.Morgan when it bought Bear Stearns – plus the $200bn rescue of Fannie Mae and Freddie Mac and another $300bn for the Federal Housing Authority – and the US government has now pledged $900bn of tax-payers' money to support the finance industry since March.

"We're essentially continuing a system where profits are privatized and...losses socialized," says Roubini.

Put another way, "from financialization of the economy to the socialization of finance [it's] a small step for lawyers, a huge step for mankind," as former Bank of England member Willem Buiter puts it in the FT.

Sovereign government bond yields rose strongly this morning as prices slipped, but 3-month US Treasuries still pointed to the Fed halving its key interest rate by December, even after yesterday's surprising "no change" decision.

Ten-year US bond yields rose to 3.50%. Last month's inflation in consumer prices was pegged yesterday at 5.40% year-on-year.

Published on  Wed, Sep 17 2008, 13:30 GMT