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London Gold Market Report

Wed, Nov 26 2008, 13:09 GMT
by Adrian Ash

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Gold Market "Cautious" But Coin Shortage Hurts Buyers as China Slashes Interest Rates, 10-Year US Bond Yields Sink to Record Low

SPOT PRICES FOR WHOLESALE GOLD held steady in Asian and early London trade on Wednesday, moving between $811 and $815 an ounce as world stock markets gave back one-fifth of this week's rally to date.

"Gold bounced wildly [on Tuesday] to end the day almost unchanged," says Walter de Wet at Standard Bank in his note from Johannesburg. Indeed, all markets "were directionless," he adds, despite the Federal Reserve promising a further $800 billion to spur domestic US lending.

"This could be because US markets are winding down for a long weekend (tomorrow is the US Thanksgiving holiday). It could also be that uncertainty has been increasing this week, and no investor wants big exposure, especially with volumes low.

"We foresee cautious markets until at least Monday next week."

Meantime in the forex market, "something is changing," notes De Wet's colleague on the currency desk, Steven Barrow.

"When markets turn more risk averse [and stocks fall in price], the Japanese Yen performs very strongly across the board. But when risk returns the Yen hardly weakens.

"This suggests there is a strong underlying demand for the Yen that should ensure not just 80 against the Dollar in time but also 100 against the Euro."

Today the Japanese Yen held near ¥95 per Dollar and pushed the Euro down 3.4% from Tuesday's early high at ¥126 as the Nikkei stock index lost 1.3% – down by one-tenth for the month so far.

Tokyo Gold Futures – benchmarked for delivery in Oct. 2009 – ended the session unchanged at ¥2,467 per gram, 14% higher from the end of Oct. but down by one-quarter from July's 25-year high.

The Shanghai stock market eked out a 0.5% gain after the People's Bank of China delivered its sharpest cut to interest rates since the Asian Crisis of 1997.

Slashing more than 1% off the cost of borrowing, the move "reflects Beijing's concerns about the rising risk of a growth slump and deflation," reckons Qu Hongbin, chief economist at HSBC in Hong Kong.

He forecasts a further 2.5% cut to the cost of borrowing, down to 3.4% or below, by May 2009.

"The escalating financial crisis that began in August 2007 has pushed the global economy into recession," says a research note from the Global Insight consultancy today. It pitches global recession as annualized growth, after inflation, below 2.0% per year.

"The world's real GDP growth is projected to slow from 3.9% in 2007 to 2.7% this year and 1.0% in 2009," Global Insight predicts, "the worst performance since 1982."

Today the Euro slipped back from a three-week high of $1.3050 to the Dollar, while the British Pound – now faced with the greatest public debt issuance in UK history – retreated 1.1% from a fortnightly high of $1.5500, hit in Asian trade.

The Gold Price in Sterling held £15 below Monday's near-record high of £550 an ounce.

Crude oil meantime ticked back above $51 per barrel, while government bond prices rose sharply once more, pushing the yield offered by 10-year US Treasuries down 9 basis points to a record low of 3.02%.

The latest US inflation data – released yesterday with news of a 0.5% contraction in economic output – said prices rose 4.7% year-on-year during the July-to-Oct. period.

"Year-end is coming, so the [gold] jewelry and industrial sectors are trying to reduce inventories," said Dick Poon, head of precious metals in Hong Kong for Heraeus, the giant German refining group, to Reuters this morning.

"They don't want to buy for the time being. They still want to keep more cash."

The Gold Coin Shortage hitting buyers in the retail investment market continues to wear on, however, with major US dealers no longer able to specify expected waiting times for new orders.

"We have only Maple Leafs and Krugerrands, one ounce only," says a local dealer in Colorado on his website. "2-3 week delay. No other gold items."

Over in Australia, "the Perth Mint is not taking any more orders for gold until January," writes Greg Canavan for the Fat Prophets newsletter.

"Our guess is that the Mint does not want to expose itself to higher future prices, given that it does not have the inventory to meet the demand for bullion."

But with Gold Investment demand from buyers willing to suffer the high costs and hassles of dealing in Gold Coins now surging for more than three months, "the jump in Gold Prices has brought some physical product onto the market," reports Patrick A. Heller, a coin dealer writing at Numismaster.com for Krause Publications.

"You still are typically facing 1-3 weeks delivery on US American Eagles, Canada Maple Leaves, Austrian 100 coronas, Mexican 50 pesos, and the like, but the premiums at which they have been selling above gold spot are now down about 25% in the past few days."

Here in London, however, Gold Dealers are still charging 10% and more above Spot Gold prices for even the most heavily minted coins, such as South African Krugerrands.

For more collectible items – where scarcity adds to numismatic value – "coin dealers are concerned that the overall drop in consumer spending may carry over into the numismatic market," says Patrick Heller.

Published on  Wed, Nov 26 2008, 13:11 GMT