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London Gold Market Report

Thu, Sep 18 2008, 12:19 GMT
by Adrian Ash

BullionVault.com

THE PRICE OF PHYSICAL GOLD rose to $880 an ounce early Thursday – more than $100 above Wednesday's US opening – as world stock markets bounced on a "liquidity injection" of $242 billion from the big central banks, led by the Federal Reserve.

Wednesday's sudden 10% jump in Gold came after the US Treasury said it had recapitalized the Federal Reserve's own balance-sheet with $40 billion.

Another $60bn will follow today (Thurs) after a second auction of Treasury bills.

Trading-room gossip in London also spoke of a huge "options declaration" late Weds morning, when the seller of a large call option failed to hold the price below $785. As it shot above that strike price, they were forced to chase Gold higher in covering their short position.

"The timing [of today's joint central-bank announcement] so early in the trading day shows both the severity of the strains in the interbank market and as well the authorities’ determination," believes one European economist at Barclays Capital.

Hong Kong shares reversed an earlier 7.5% plunge, while the FTSE100 here in London shot 1.4% higher at the opening.

Russian president Dmitry Medvedev meantime pledged $19.59bn of support for the Moscow stock market – down by almost one-third since the start of Sept. – and promised it would re-open on Friday.

US Treasury bond yields crept higher as Wednesday's "safe haven" panic subsided, but three-month notes still offered just 0.03% to new buyers – up from yesterday's six-decade low of 0.003%, the lowest level since the London Blitz drove investment cash to seek shelter in government debt across the Atlantic.

"The Treasury's move [to support the Fed's balancesheet] – together with the increasing likelihood of US budget deficits and/or monetary stimulation – led to US Dollar depreciation against the Euro in late London trade, supporting gold's move higher," reckons Max Layton at Macquarie in Australia.

"Gold's status as a safe haven is being tested and proved," agrees Hussein Allidina, head of commodity research at Morgan Stanley – also speaking to the Financial Times.

"Investors are clearly concerned about the outlook for risky assets and this is benefiting gold and could benefit gold further should foreign central banks become concerned about their holdings."

Central banks party to the 2004 gold-sales agreement now have one week left to reach this year's 500-tonne ceiling. The central bank of Venezuela said Wednesday it's looking to buy 15 tonnes per year to re-issue as Gold Investment products including coins.

Back in the private Gold market, "the same market participants who got out of gold [this summer] are coming back in now," reckons Carlos Sanchez, an analyst at CPM Group in New York.

"This is the start of an upward move."

Both the Pound Sterling and Euro currencies also extended their overnight gains vs. the Dollar, reaching three- and two-week highs respectively at $1.82 and $1.45.

For private investors trading professional, wholesale gold bars at live prices via BullionVault.com, the price to buy in Zurich, Switzerland held above £485 in Sterling and €611 in Euros – both a two-month high.

Meantime in London, ETFS Ltd. – the market-leading issuer of exchange-traded commodity note (ETCs) – said it was "trying to get market makers back in the market" after they stopped making prices in response to the collapse of American insurance giant AIG.

"We can give no assurance as to whether these...alternatives can be implemented at this stage," said the chairman, Graham Turkwell, on a conference call this morning.

He stressed that the loss of liquidity in ETFS's so-called classic, forward, inverse and leveraged DJ-AIG commodity index notes has "absolutely nothing to do with the metal or oil securities" such as its Gold ETF.

Published on  Thu, Sep 18 2008, 12:20 GMT