London Gold Market Report
Thu, Mar 12 2009, 14:36 GMT
by Adrian Ash
Gold Jumps as Swiss National Bank Joins "Forceful Relaxation" of Monetary Policy; South African Mine Output Sinks Again
THE PRICE OF GOLD jumped into the New York opening on Thursday, recovering two-thirds of this week's 5% losses as the surge in world stock markets reversed.
By mid-afternoon in Frankfurt, the Dax index of German equities traded 0.9% lower.
US crude oil meantime rose sharply to cut this week's losses above $43 per barrel.
The European single currency fell back from a 3-week high vs. the Dollar hit overnight at $1.2850.
For French, German and Italian investors Ready to Buy Gold today, the price moved above €723 an ounce – some 9% below last month's record highs, but 12% higher for 2009 so far.
"Investor demand for gold is there until we see a sustained rally in equities," said one analyst quoted by Reuters this morning.
"The inability of the equity markets to build on gains created a climate conducive to higher Gold Prices," agrees James Steel at HSBC, pointing to Wednesday's 1.6% gain, "as risk-averse buyers moved cautiously back into bullion."
Over on the bond market on Thursday – where US Treasuries held steady despite fresh concerns that China's shrinking export sales means it can't continue to fund America's fiscal deficit – 10-year UK gilt yields slid below 3.0% for the first time in history as bond prices rose.
The move came after the Bank of England began buying gilts – so-called "quantitative easing" – on Wednesday.
"So far, so good," reckons John Wraith, head of UK interest-rate products at RBC Capital Markets, speaking to the Financial Times.
"The UK bond market has really moved as a result of the Bank's quantitative easing. We have seen yields fall by 50 basis points since the announcement last Thursday."
Yesterday's auction of cash in return for gilts – effectively funding the UK's fiscal deficit with freshly-created money – drew bids for 5 times the £2 billion available.
Today the Gold Price in Sterling flipped the week's earlier drop, rising 2.1% to touch £677 an ounce and standing 13% higher for 2009 to date.
"Faced with the double whammy of deflation and slumping exports, all policymakers want a weaker exchange rate," notes Steven Barrow for Standard Bank's daily forex comment.
"The problem is that [currency-to-currency] not everyone can have a weaker exchange rate. The need for global policymaking togetherness would seem to rule out beggar-thy-neighbor competitive devaluations...[but] the Swiss National Bank announces its monetary policy update today. It has made no secret of its desire for a weaker currency."
Already charging interest of just 0.5% for Swiss Francs – the anti-inflationary stalwart of "hard money" investors during the 1970s – the SNB today slashed the cost of money to 0.25%, citing "the risk of negative inflation" as it moved to "forcefully relax" monetary policy.
The SNB also out-did the "quantitative easing" of the US and UK by announcing it would start selling Francs in exchange for foreign currencies on the open-market.
Swiss Francs tumbled in price on the news, losing 3% to the Euro inside 15 minutes.
On the supply side of the gold market, meantime, South Africa reported on Thursday a near-9% drop in gold production for January from a year earlier.
Jan. 2008 had already seen South African Gold Mining output sink 16.5% after a power outage imposed by struggling state utility Eskom.
Formerly the world's No.1 gold producer, South Africa has now slipped into third place – well behind China and the United States – as its annual output has fallen in half over the last decade.
