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London Gold Market Report

Wed, Jan 14 2009, 13:19 GMT
by Adrian Ash

BullionVault.com

Gold Slips as Euro-zone Bonds & Stocks Tumble, Ireland Warns of IMF Rescue; Asian Shipping Rates Fall to Zero as World Trade Collapses

SPOT GOLD PRICES ticked down from a two-day peak after the London Gold Fix on Wednesday morning, slipping to $823 an ounce as European stock markets slumped for the fifth session running.

Crude oil pushed up to $39 per barrel – a level first breached in May 2004 – while government bond prices slipped lower worldwide, pushing the 10-year German bund yield back above 3.0%.

With traders awaiting Thursday's interest-rate decision from the European Central Bank (ECB), the risk of credit default by several Eurozone governments was priced sharply higher.

"Given the huge supply of bonds that's due," says Ian Stannard at BNP Paribas – and with Eurozone issuance put at €1 trillion or more in 2009 – "it's going to leave the Euro extremely vulnerable."

Possible downgrades are now expected on the government debt-rating of Italy and Portugal after Standard & Poor's put Spanish government debt on "credit watch" alongside Greece and Ireland.

In Portugal, one in every €8 of economic turnover goes overseas to settle its trade deficit. Rome owed 109% of Italy's annualized GDP on the latest data.

Today the Irish prime minister, Brian Cowen, warned trades union leaders that without public-sector pay cuts and job losses, he may seek a rescue by the International Monetary Fund (IMF).

Dublin's budget deficit is now running at 6.2% of Ireland's annual economy, and the cost of credit-default swaps on its sovereign debt has now risen 7-fold since Sept.

Default insurance on serial bankrupt Mexico, in contrast, has fallen according to CMA Datavision.

Back in the gold market on Wednesday, "$800 is the bottom price for the time being," reckons Yukuji Sonoda at Daiichi Commodities in Tokyo, speaking to Bloomberg.

"That's where demand becomes very strong in Asia."

But "Some people still talk about gold going below $800," countered one Asian dealer to Reuters early today.

"If it does, we may see a sharp increase in physical demand.

"You may even see a shortage in physical supply...but it will be mainly due to the market crunch, which discourages banks to hold too much stock."

Both the Euro and British Pound gave back short overnight rallies vs. the US Dollar and Japanese Yen, meantime.

The Gold Price in Euros held 2.7% above Monday's 3-week low. For British investors wanting to Buy Gold today, the price was 3.3% stronger.

"Volatility is likely to remain high this week," says Walter de Wet in Standard Bank's precious metals note from Jo'burg today, "partly due to the ECB's rate decision [on Thursday].

"It is keeping many market participants guessing. But Standard Bank expects a 50 basis points cut...which should continue to support the Dollar against the Euro."

New data this morning showed industrial production across the 16-member Euro economy sinking by 7.7% year-on-year in Dec.

Japan reported a 72% collapse in new machine tool orders for Dec., while The Daily Telegraph here in London reports an absolute collapse in Asian shipping fees.

"They have already hit zero," says one broker in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmit¬igated disaster."

Container fees for ships leaving northern Asia are now below operating cost, the paper goes on.

Lloyds' List – the shipping industry's trade bible – says Singapore brokers are waiving fees entirely.

Looking ahead for Gold in 2009, "the price should benefit from the fact that large mining companies are likely to struggle to replace reserves at the current rates of depletion," writes Scotia Capital analyst geologist Trevor Turnbull in the latest Alchemist magazine for the London Bullion Market Association.

"Likewise, if impaired access to project financing continues, many deposits in the hands of smaller Gold Mining companies are unlikely to come to fruition without help from established producers.

"The net result should be beneficial to the Gold Price as world wide production levels are maintained in a best case scenario, but less likely to grow through the emergence of new junior companies."

Forward Gold Hedging of future production by gold miners is also "likely to decline" Turnbull believes.

Published on  Wed, Jan 14 2009, 13:19 GMT