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London Gold Market Report

Mon, Nov 24 2008, 13:30 GMT
by Adrian Ash

BullionVault.com

Gold Jumps to 6-Week High as Western Stocks Rally on Banking Bail-Outs, Surge in Government Money Supply

THE PRICE OF GOLD jumped 4% to a new 6-week high early in London on Monday, touching $822 per ounce as Western equities also gained and the US Dollar weakened on the currency market.

As the European single currency rose above $1.2700, the Gold Price in Euros held just below €645 an ounce – still its best level since the record spike to €685 of Oct. 10th.

For UK investors looking to Buy Gold today, the price moved 3.4% higher to £545 an ounce, also a new six-week high.

"Gold well and truly broke out of its congestion pattern on Friday, closing over $50 higher on the day," notes Mitsui, the precious metals dealer, here in London.

"Looking back to the start of the year, we would have expected a move like this to see some follow through, but with Tokyo out today [for Japan's Labor Day holiday], liquidity has been thin.

"Physical demand has slowed down as many participants did not see this move coming. Expect buying support to come back in at $750."

Latest data from the Gold Futures & options market, released after Friday's close, showed a further decline in leveraged trading by hedge funds and other "large speculators", with the total number of their bullish bets falling to a two-year low in the week-ending Tues 18th Nov.

Net-net, Speculative Funds Trading "Paper Gold" on credit have cut their bullish position to the smallest level since spring 2005.

The so-called "smart money" of gold-industry traders, in contrast, continues to hold its least bearish position since 2001.

Over in the commodity pits, meantime, crude oil today bounced 3.5% from Friday's 22-month low. Government bonds ticked lower, pushing 10-year US Treasury yields up to 3.22%, while an early 4% jump in both Frankfurt and Paris equities came against a flood of weak economic data.

German business confidence has sunk to a 16-year low in Oct., according to the Ifo Institute's latest survey.

New industrial orders across the 15-member Eurozone shrank by 3.9% in Sept., the official EuroStat agency reported, while the region's trade deficit worsened to €10.6 billion from €5.3bn in August.

"The worst is yet to come," said Olivier Blanchard, chief economist at the International Monetary Fund (IMF), to Germany's Finanz und Wirtschaft newspaper on Saturday.

"A lot of time is needed before the situation becomes normal."

He believes global economic growth will not revive before 2010. Until then, emergency IMF aid to sovereign states including Latvia, Iceland, Hungary, Ukraine, Serbia and Pakistan threatens to empty the Fund's own coffers.

"[Capital flights] can be so significant that the IMF alone cannot counter them," Blanchard said. "We do not have this money. We never had it."

In the last two weeks alone, he confirmed, the IMF has spent one fifth of its $250 billion resources.

Nevertheless, banking stocks led Monday's surge in Euro-denominated stock markets, pushing shares in Bank of Ireland more than 15% higher after the Irish government offered to lead a €3bn rescue, working together with private equity groups.

The cash comes on top of Dublin's explicit guarantee of €440bn in Irish bank deposits.

Across the Atlantic last night, and on top of the $25 billion that the US government gave it last month, Washington pumped another $20bn into Citigroup – the world's largest financial services group – and guaranteed $306bn of its assets.

The bank will take the first $29bn of any losses on its portfolio. The guarantee runs for 10 years on real estate-related investments, five years on everything else.

The US tax-payer's stake will held in the form of preferred shares paying an 8% dividend, well below the 10% annual return demanded by private fund manager Warren Buffett when he pumped $5bn into Goldman Sachs in late Sept.

There will be no change at the top of Citi's management. Its stock rose 40% in early Frankfurt trade.

Meantime in the Middle East, the authorities in Saudi Arabia – where the stock market has lost more than 61% year-to-date – cut their benchmark lending rate by 1.0% to 3.0%, and slashed the ratio of cash deposits which private banks must hold at the central bank from 10% to 7%.

Growth in the Saudi money supply was last pegged at 19% per year.

Here in London today, prime minister Gordon Brown promised (yet again) to do "whatever it takes" to avoid a deep recession in the UK economy.

"After many years of inflationary pressures," the PM told an audience at the Confederation of British Industry (CBI), "we face today the opposite threat: the prospect of rapidly declining inflation."

Front-running this afternoon's official budget announcement from his chancellor, Alistair Darling, Brown promised higher public spending alongside short-term tax cuts to prevent the bubble in household debt – now valued at more than 100% of annual economic output – from collapsing into Deflation.

While governments worldwide attempt to inflate their way out of deflation, Gold Market supplies continue to fall according to the latest analysis from the GFMS consultancy.

Reporting its hedge-book analysis for Societe Generale, "the corporate landscape is increasingly challenging for the [Gold Mining] industry as a whole," says GFMS, "but nowhere more so than the junior mining sector" – the source of new exploration and resource development.

"Given the extreme economic uncertainty, the lack of available credit and high cost of project finance, project exploration spending is being cut back and some near term projects have stalled," says the SocGen report.

"Even with juniors’ share prices having collapsed...by 70% and in some cases by 95% from their 12 month highs...the [largest] Tier 1 companies have so far dismissed acquisition opportunities by and large, electing to preserve capital for existing project development and to keep their opportunities flexible."

Meantime, GFMS adds, gold sales by official sector owners under the Central Bank Gold Agreement (CBGA) first signed in 1999 were the lowest on record in the year-ending Sept. 26th.

The major Western governments have reduced their central-bank gold reserves by one-eighth since the start of this decade. The Gold Price has tripled and more against all leading currencies.

"[So-called] 'free market' capitalism under a fiat money regime does not produce the same blessings (sustainable prosperity) that are produced by true free market capitalism within a monetary system anchored by gold," writes author Richard Duncan in today's Financial Times.

"When President Nixon severed The Link Between the Dollar and Gold, he changed the nature of the Anglo-American economic model and ultimately destroyed it."

Published on  Mon, Nov 24 2008, 13:32 GMT