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London Gold Market Report

Wed, Oct 1 2008, 12:21 GMT
by Adrian Ash

BullionVault.com

THE PRICE OF SPOT GOLD bounced 1.6% from an overnight low of $860 on Wednesday, steadying at $876 an ounce as Western stock markets ticked higher despite a raft of miserable Eurozone data.

Crude oil rose back above $100 per barrel, while long-dated government bonds continued to rise in price, pushing yields still further below the rate of inflation.

The Dollar slipped from two-week highs on the currency markets.

"European economic woes should sustain the greenback's safe-haven appeal today," believes Manqoba Madinane at Standard Bank in Johannesburg, "despite downside correction warnings from technical momentum indicators, and this could impact precious metals.

"Several other warnings of downside risk for precious metals have emerged," he adds, noting that CDX investment grade credit spreads have narrowed, "indicating receding financial market system risk."

Tuesday saw inter-bank lending rates leap yet again, however, with the cost of raising new finance curbing capital expenditure and M&A budgets across Latin America, according to Latin Finance.

Anglo-Swiss mining giant Xstrata pulled its $8.9bn bid for Lonmin Plc, sending stock in the world's third-largest platinum miner down by 30% and more.

Half-nationalized Belgian bank Fortis was forced to scrap the $3bn sale of its asset-management division due to "severe market disruption and the ongoing uncertainty in the global capital markets."

Here in London, Dollar LIBOR rates reached 6.88% due to the "lack of confidence between counterparties in the financial sector," as one Nomura analyst puts it.

"Conditions are illiquid in most markets," says Madinane at Standard Bank, "including the precious metals. We expect volatility to remain high."

The lack of confidence hitting world money markets is reflected in "an enormous pick-up in Gold Investment demand," said Jeremy Charles, chairman of the London Bullion Market Association, at the LBMA's annual conference in Kyoto, Japan, on Tuesday.

"I have never seen a market like this in my 33-year career. The gold refineries cannot produce enough bars.

"High bullion prices are here to stay," Charles went on, speaking to the Financial Times. "Gold will be looked in a different way even when the credit crisis ends."

The head of commodities sales at Barclays Capital, Jonathan Spall, agreed, citing a "sea change" after almost 30 years of investors and financial advisors ignoring Gold Bullion.

"These days hedge funds [for example] see gold a much interesting place to be in," says Spall.

On the data front, meantime, Wednesday showed German retail sales falling 3.0% year-on-year in August, while Swiss and broad European business sentiment also fell sharply.

Here in London, new data showed UK manufacturing output falling at the fastest pace since the 1992 recession. "The service sector has ground to a halt," reports The Times online, with Alan Clarke at BNP Paribas calling the numbers "very grim indeed."

Sterling fell to a new two-week low of $1.7770 on the forex market – down from Monday's start of $1.8450 – helping to keep the Gold Price in British Pounds above £490 an ounce.

The Euro meantime recovered 1.5¢ from its overnight low beneath $1.4000 the second dip below that level in 12 months.

The Gold Price in Euros retreated 1.2% from the new 6-month highs reached overnight, standing almost twice above its level of Oct. 2004 at €625 an ounce.

Back in Washington – where lawmakers meet again Wednesday to vote on a reworked Bail-Out Bill – "if we don't pass the Paulson plan," reckons Michael Mussa, formerly chief economist at the International Monetary Fund (IMF) and now a senior fellow at the Peterson Institute for International Economics, "we could have a steep recession that is among the worst we've seen in the post-War era."

"We're right at the moment where action is needed," agrees the current IMF chief, Dominique Strauss-Kahn.

"A non-perfect plan is better than no plan at all," he claimed to Reuters overnight.

European bureaucrats and policy-wonks also lined up to demand a "solution" from US politicians.

"It is the responsibility of the United States to other countries," says Russian finance minister Alexei Kudrin.

"The turmoil we are facing has originated in the United States and has become a global problem. The US has a special responsibility in this situation," says Johannes Laitenberger, spokesman for the European Commission (EC).

"The quick passage of a US rescue package is the precondition for creating new confidence on the markets," claims German chancellor Angela Merkel.

But taking a longer-term view of the rush to pass the "No banker left behind" bill, Sultan Al Qassemi – founder of Barjeel Securities in Dubai, writing for The National in the UAE – says that "the only thing this foolish bail out is going to prevent is a fresh case study for students to learn about the repercussions of allowing banks to fail.

"In today's animal farm, socialism is coming to the rescue of capitalism. Hats off to Karl Marx."

Published on  Wed, Oct 1 2008, 12:22 GMT