London Gold Market Report

Wed, Sep 10 2008, 12:18 GMT
by Adrian Ash

THE PRICE OF GOLD sank in Asia early Wednesday, falling 2.5% from the New York close to bounce off an 11-month low and hold around $774 in the first-half of London dealing.

This fresh sell-off in Gold came as world stock markets also fell once again, erasing Monday's "Fannie-n-Freddie" bounce on the back of Wall Street's worst down-day of 2008 so far.

Base metals and soft commodities continued their slide, while the US Dollar reversed an overnight dip to hold the Euro currency near a 12-month low beneath $1.41.

Crude oil crept higher, however, rising $3 above $100 per barrel after the Opec oil cartel switched tack at its summit in Vienna and said it will reduce output quotas this fall.

"The investment landscape may feel the same but, in fact, it is changing," says UBS analyst Jeffrey Palma in a note to clients, summing up the Dollar-forced slump in all asset classes.

"Specifically, we believe that investors need to re-orient their portfolios to exploit a continuation of three interrelated trends – lower interest rates, a stronger US Dollar and weaker global growth."

Early Wednesday, te US currency's on-going rally dented even US government bonds, pushing the yield offered by 5-year debt six basis-points higher to 2.92%.

That's still barely half the most-recent reading of US consumer-price inflation, however, and following the nationalization of $5.4 trillion in Fannie Mae and Freddie Mac mortgage debt at the weekend – now backed by the balance-sheet of the US government – the cost of hedging against a potential default on Treasury bonds reached a record level overnight, according to CMA Datavision.

Credit-Default Swaps (CDS) on five-year US bonds cost 0.18% by the London close on Tuesday. They were trading at one-third that price only five months ago.

Buying CDS insurance on comparable Japanese government bonds costs 0.16% today. Insuring against default on German bunds costs 0.08%.

Back in hard assets, meantime, "the overall picture for the precious metals is bearish," reckons today's note from Mitsui.

"Gold is sitting on a support line dating back to Q3 2005 at $760 (we have made a low of $762 so far). Silver has given back all of the gains since the credit crunch begun in August 2007, dropping to $11.

"Platinum is currently trading at $1220, testing the trend we have seen for the last seven years, and palladium continues to drop sharply, having made a low of $220 overnight."

But Wednesday's fresh fall in the precious metals market was less marked against the world's other major currencies, taking the Gold Price in Euros back to a three-week low of €542.

For British investors suffering a 12% in the Pound's trade-weighted currency index since mid-July, the Gold Price in Sterling slipped to £434 an ounce – a level last seen on August 20th.

Today Barratt Developments – the UK's second-largest home builder – canceled its dividend to shareholder, reported a 68% drop in annual profits, and announced 1,000 job losses.

"There is little prospect for any material improvement in trading conditions until mortgage finance and customer confidence return," said the firm's CEO, Mark Clare.

Estate agents previously enjoying a tripling of UK house prices since 1998 are now selling an average of just one property a week, according to the latest data from the Royal Institution of Chartered Surveyors.

Over in the world's physical Gold Market, "Demand from our regular customers such as India, Indonesia and Thailand is still there," said a Singapore dealer to Reuters overnight.

"There's a [continuing] shortage of physical bars in this region, which also helps support premiums."

The heavy Gold Buying season in India – the world's No.1 consumer of physical gold – will take a break for the Shradh remembrance week starting next Monday, before the festivals that culminate with Diwali in late October begin again on Sept. 25th with Gurupushyamrit, marked on the Hindu calendar as an auspicious time to start new ventures.

Jewelers in Indonesia also reported strong Gold Buying today ahead of next month's Muslim Eid al-Fitri celebrations. But on the other side of the trade, however, new Gold Mining ventures worldwide look increasingly unlikely to face problems raising funds thanks to successful lobbying by environmental groups.

Tuesday saw the $375 billion Norwegian state's wealth fund dump its entire holding in the giant, diversified miner Rio Tinto, accusing it of "severe environmental damage" at one mine in West Papua, Indonesia.

Rio holds 40% of the Grasberg site, operated by Freeport McMoRan, the US-based gold miner, and besides paying the Indonesian Army for "security" during the 1990s that saw several protestors disappear, "the operation dumps 230,000 tonnes of tailings, or waste rock, into the Ajikwa River every day, and campaigners claim that this has produced high levels of pollution," reports The Australian newspaper.