London Gold Market Report

Mon, Sep 8 2008, 12:18 GMT
by Adrian Ash

THE SPOT PRICE OF GOLD whipped violently in Asian trade on Monday, shooting 1.8% higher after the US government nationalized the massive Freddie Max and Fannie Mae mortgage lenders, before giving back $10 of that move to trade at $808 an ounce by lunchtime in London.

World stock markets leapt and government-bond prices fell, meantime, pushing the German Dax index almost 3.4% higher as 10-year Bund yields rose one-tenth of a per cent to 4.10%.

"[Yet] neither the real estate crisis nor the weakness of the US economy are now over," writes Walter Niederberger from San Francisco for the Swiss Tagesanzeiger.

"In the best case, the nationalization of Fannie Mae and Freddie Mac marks the beginning of the end, but not yet the rock bottom."

In his third "Sunday Special" of 2008 so far, US Treasury secretary Hank Paulson vowed yesterday to pump $100 billion into each of the technically bankrupt Fannie Mae and Freddie Mac mortgage agencies.

The US taxpayer will also buy $1bn of the failed agencies' preferred shares in the stock market, as well as $5bn of their outstanding bonds.

Fannie and Freddie's ordinary stock was immediately cut to a "junk" rating by two of the world's leading ratings agencies, since dividends will now be eliminated as the Treasury fights to protect bondholders instead and looks to reduce the agencies' mortgage book by 10% per year from 2010.

The governments of China and Japan – the two largest owners of sovereign US Treasury bonds – are estimated to hold more than $200bn and $100bn respectively of Fannie- and Freddie-backed mortgage bonds.

Credit rating agencies such as Fitch, Standard & Poor's and Moody's are now implicated in a raft of investment lawsuits, reports The Age in Australia, for helping to fuel the US housing bubble of 2003-2007 by awarding overly-generous ratings to high risk bonds.

Standard & Poor's last night confirmed its top-level "triple A" rating on the United States' own sovereign debt.

It felt the move necessary due to the huge increase in outstanding US Treasury obligations forced by Sunday's "conservatorship" – the new euphemism used to describe the effective nationalization of $5.4 trillion in Fannie and Freddie bonds.

For now, however, "it's hard to argue with the Dollar's trend," said one commodities analyst to Bloomberg overnight, watching the Japanese Yen drop at the fastest rate in three months.

"The United States is ahead of the curve in terms of getting ahead of the economic downturn," he believes. "Precious metals and all commodities are coming back to earth."

Crude oil today added $1 per barrel to $107.85, but base metals sold off sharply while soft commodities held flat.

After an initial jump in the Euro vs. the Dollar on the forex market, the single currency fell hard in London trade, sliding to a new 11-month low beneath $1.4200.

The Gold Price in Euros rose above €567 an ounce – a one-week high that undoes half of gold's 15% drop from mid-July. For British investors, the Gold Price in Sterling rose 1.7%, undoing all of last week's losses at £458 an ounce.

The British Pound meantime re-touched Friday's 28-month lows on the currency market at $1.7550 on news that UK factory gate prices rose less quickly in August than analysts forecast.

Up 9.4% year-on-year, however, Producer Output Prices still recorded their third highest monthly inflation rate of the last 25 years.

US Producer Price data is due for release on Friday this week. The US Trade Balance for July – including the initial impact of the recent 10% jump in the Dollar's forex value – will be reported on Thursday.

"Precious metals are looking a bit firmer," notes Mitsui, the precious metals dealer, today "[but] Gold will need to quickly climb above $820 if it is going to challenge the top end of the current range between $780 and $845."

"Professional [investor] interests have fled the market," says the latest Precious Metals Monthly from Standard Bank in Johannesburg, "[yet] physical demand was strengthening dramatically through August and the dichotomy between these two elements in the market became increasingly marked.

"The underlying strength of physical demand points to a recovery in price, but this will need to be prompted by a change in the Dollar's fortunes."

Also pointing to continued strength in the New Super Dollar, analysts at Deutsche Bank today forecast a drop in the Gold Price to $750 an ounce by November.

"From a positioning perspective," they write, "net speculative longs in Gold Futures have declined to their lowest levels since the end of last year.

"We expect a further reduction in net length in an environment where the US Dollar is continuing to strengthen."

What the Deutsche analysts miss, however, is the fact that speculative "non-commercial" players in the Gold Futures market consistently cut their bullish positions just before strong upward moves in the price.

Latest data now shows that while speculative players continued to cut their bullish positions last week – even adding to their bearish bets on gold for the fourth week on the trot and growing their short position to a 15-month record – the so-called "smart money" of the commercial gold industry yet again went in the other direction.

Commercial traders working on behalf of producers, refiners, fabricators and other gold-industry players remained bearish overall; they are, after all, in the business of selling gold. But as a proportion of their total contracts now outstanding, the commercials' bullish bets grew above one-in-three to a 13-month record.

August 2007 marked the start of a near-50% jump in the Gold Price over the following seven months.

Meantime in the physical Gold Bullion market, and despite growth in Russian and Chinese gold output – driven in part by recycling of scrap metal supplies – global gold output for 2008 "is most likely to shrink again compared to the previous year," writes Wolfgang Wrzesniok-Rossbach in Hanau, Germany, for the Heraeus refining group.

"The same holds true also for central bank sales. In the current year, they could hit the lowest figure since 1999, when the first Central Bank Gold Agreement was signed."

European signatories to the 500-tonne per year limit set by the CBGA have until Sept. 26th to sell around 170 tonnes of gold.