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London Gold Market Report

Tue, Nov 25 2008, 13:30 GMT
by Adrian Ash

BullionVault.com

Gold Buyers Make "Significant Shift to Safe-Haven Metal" as Governments Throw "All the Money in the World" at Failing Economy

THE SPOT PRICE OF PHYSICAL GOLD slid almost 2% early in London on Tuesday, recording an AM Fix of $802.50 per ounce before bouncing sharply and moving back above £540 and €635 for British and Eurozone investors respectively.

Crude oil dropped 4% to $52.30 per barrel, while 10-year US Treasury bond yields reversed yesterday's rally to stand back at 3.23%.

"There has been a significant shift into physical gold due to its safe-haven qualities," noted David Holmes, head of precious metals dealing at Dresdner Kleinwort in London, to the Financial Times overnight.

"Until very recently, that [physical] demand interest was being offset by paper investors who were liquidating speculative long positions as part of the wider pattern of deleveraging."

The total number of Open Contracts in Gold Derivatives shrank last week by 6% from a month earlier.

Over in the forex markets today, where traders reduced their short-Euro positions last week, the European single currency retreated from an early 3-week high vs. the Dollar at $1.2950.

The Japanese Yen also rose as Tokyo traders returned from a long weekend's holiday, pushing the Dollar almost ¥2 lower to ¥95.60 and driving the British Pound back towards ¥145 – the 13-year low first hit in mid-Oct.

Base metals rose sharply at the London Metal Exchange, meantime, but the UK-listed mining sector still fell – adding to the two-thirds it's lost over the last 12 months – on news that world No.1 BHP Billiton has abandoned its $150 billion bid for Rio Tinto, the world No.2, because of "recent global events and associated falls" in commodity prices.

"Many mining companies are now trading significantly below replacement cost and or book value," said Evy Hambro, manager of the $4.7 billion World Mining Fund at Blackrock, in a London presentation today.

"This will not escape the attention of mining company managements when credit markets thaw."

On Hambro's math, stocks in many strong mining companies are trading as low as 50% of replacement costs, with others trading at cash.

But "It is difficult to see when the bottom will be for miners," reckons Didrik Van Zuylen, manager of PriFund's Gold & Precious Metals fund for Banque Privée Edmond de Rothschild in Geneva.

Currently ranked No.2 out of 21 precious metals equity manager tracked by CityWire, "It could take some time before we see a rally in the mining sector," he told the ratings group Tuesday.

"For the moment we are seeing big volatility."

Some 52% of Van Zuylen's fund is currently invested in physical Gold Bullion, leaving less than half of it invested in Gold Mining stocks. Over the last 12 months, and with gold-mining equities down more than 55% on the Amex Gold Bugs index, he has lost his investors only 6.2% reports CityWire.

The average gold-mining equities fund fell by more than 28%, while the price of gold in Dollars is unchanged at $800 an ounce.

For UK gold buyers gold has added 38%, rising 16% vs. the Euro, 28% for Canadian investors, and 40% vs. the Australian Dollar.

On the economic front meantime, new German data today confirmed a 0.5% contraction in GDP for the July-to-Oct. period, while private consumption growth in the Swiss economy was pegged below its long-term average during October for the first time in 3 years, according to the Swiss-UBS index.

Mortgage approvals here in the UK fell to a new record low last month, the British Bankers Association reported, down 52% from the same time last year.

"The situation is very similar to the 1930s, but it is going to unfold differently," says George Soros, the billionaire hedge-fund manager, in an interview with Germany's Speigel magazine.

"We have learned not to allow the financial market to collapse. We will spend all the money in the world to prevent that from happening."

All the money in the world grew to a yet-bigger number on Tuesday, as the Bank of Korea put five trillion Won ($3.3 billion) into a new government lending scheme aimed at unfreezing Seoul's money market.

The South Korean government has already announced a "stabilization" package of 10 trillion Won.

The central bank of Malaysia today cut its key interest rate by 0.25% to 3.25% – the first cut since spring 2006 – and reduced the ratio of cash deposits which commercial banks must keep in its reserves, stoking the supply of credit.

The International Monetary Fund (IMF) meantime approved a $7.6 billion loan package for Pakistan in a bid to avert a debt default before the end of 2010.

Over in Washington, US Treasury secretary Henry Paulson was due to announce a new tax-funded lending institution – run directly by the Federal Reserve – offering auto loans, student loans and credit cards to consumers.

"We are going to do what what's required to jolt this economy back into shape," promised US president-elect Barack Obama at a news conference yesterday.

"We have to make sure that the stimulus is significant enough...of [the] size and scope necessary...that it really gives a jolt to the economy."

Published on  Tue, Nov 25 2008, 13:31 GMT