London Gold Market Report

Mon, Aug 18 2008, 12:29 GMT
by Adrian Ash

Gold Hits "Supply Squeeze" in Europe and US as Private Investors Pile In Ahead of Seasonal Surge

SPOT GOLD PRICES gave back a sharp 2% rally early in London on Monday, falling towards $790 per ounce as the US Dollar held flat on the currency markets.

Crude oil ticked up 25¢ to trade above $114 per barrel as Tropical Storm Fay threatened rigs in the Gulf of Mexico.

European stock markets were slightly higher as the Wall Street start drew near.

"Precious metals sentiment is still bearish as the US Dollar continues to strengthen against the Euro, albeit in a volatile manner," said Walter de Wet in today's market note from Standard Bank.

"The sharp Dollar rally seen in the last month makes us more confident that the Dollar's slide against most major currencies, which began in 2001, is over," adds his colleague Steve Barrow in London, "[although] the path back to a stronger Dollar in coming years won't be a smooth one."

This new bearish consensus on Gold – mirroring a 7% jump in the Dollar's trade-weighted index since this time last month – led hedge funds and other "large speculators" to close almost one-in-five of their bullish bets in the futures & options market last week.

Overall, says the latest data from US regulator the CFTC, the total number of live gold contracts now in play shrank by 11% in the week-ending Tues 12 Aug., taking "open interest" to its lowest level since Sept. 2007.

It's down by one quarter from the same time last month and smaller by one-third from the all-time peak set back in January.

But while professional and institutional investors trading paper bets on the Gold Price scramble to reduce their positions, private individuals are creating a squeeze in physical metal right across Europe and North America.

The US Mint has reportedly halted sales of American Gold Eagle coins, and is said to be refusing new orders from gold bullion dealers.

Kitco Inc., one of the largest gold investment retailers in the USA and Canada, warns on its website that "due to market volatility and higher demand in the entire industry, we are anticipating delays in supply of all bullion products.

"Once inventory is received there may...be delays in processing and shipping by our vaults."

Meantime in Germany, the Pro Aurum dealership based in Munich says that its website hit "meltdown" last week thanks to record-high traffic. It claims the same problem hit other German gold retailers, too.

"We've seen a dramatic increase in the number of orders. We called in our gold-dealing team to work the Assumption Day holiday [on Friday]. All our branches saw prolonged waiting times for over-the-counter cash sales, and this will surely continue over the coming week."

Pro Aurum also says it cannot fulfill specialist orders for rarer coins, and claims that "major institutions" asked if they could help out with delivery of physical metal.

Here at BullionVault, in contrast – the international service for private investors wanting to slash the cost of buying, owning and selling physical gold – the availability of professional-grade gold bullion, starting from one gram and up, remains entirely unaffected.

The stock of Good Delivery Gold Bars belonging to customers grew to 8.45 tonnes last week as users bought almost half-a-tonne of warranted bullion. (You can Learn More About BullionVault here...)

"Fundamentally, I'm not sure about the Dollar in the long-term," said Masahiko Ejiri, a fund manager at the $26 billion Mizuho Asset Management Co. in Tokyo, to Bloomberg earlier today.

"I'm still a strong believer that commodity prices have to rise further because demand growth outpaces supply."

In Saudi Arabia, gold sales by value rose 14% to reach $1.3 billion between April and June reported the World Gold Council's local office today.

India's gold demand fell 47% in volume terms between January and June from the same period last year, the WGC also said. But the recent drop in world Gold Prices has had "a positive impact on demand," according to one leading jewelry dealer in Mumbai.

"Once Gold Prices stabilize at lower levels, one could see a significant increase in demand," he went on, pointing to the typical Seasons in Gold that have seen prices rise almost 10% between August and January on average over the last decade.

Meantime on Wall Street today, analysts now expect a June-to-Sept. loss costing up to $1.8 billion or more from Lehman Bros., the fourth-largest securities firm in the United States.

Officials from the US Treasury are preparing to "wipe out" existing shareholders in Fannie Mae and Freddie Mac, according to a report in Barron's magazine, as part of a cash rescue to stop the nation's largest home mortgage lenders collapsing.

Following last week's agreement by Morgan Stanley to and settle $35 million in fines and buy back $4.5 billion of untradable "auction-rate securities" – the "$330bn behemoth that melted down in February" as Martin Hutchinson puts it at Prudent Bear – the second-largest US investment bank is now said by the Wall Street Journal to be tying new hedge fund loans directly to its own credit rating in the bond market.

Essentially, a better price for Morgan's own debt means it will extend new credit to those hedge funds using its services.

"If our firm is in trouble," in short, "we would rather fund ourselves than fund hedge funds," the WSJ quotes one broker claiming to know of the arrangement. It is apparently being applied by Goldman Sachs, too.