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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

World Stock Markets Crash on Black Monday

Commodities / Gold & Silver Jan 21, 2008 - 04:48 PM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES dropped 1.6% to hit a two-week low early in London on Monday as global equity markets collapsed on what one Hong Kong stock broker called "another horrible day."

"Today it's because of disappointment that the US stimulus package [announced Friday] is too little, too late," said Francis Lun at Fulbright Securities to the Associated Press overnight.


President Bush's $140 billion package of tax rebates and business incentives could be worth 1% of the United States ' annual GDP. But "investors feel it won't help the economy recover," according to Lun, and it certainly wasn't enough to prevent today becoming a very Black Monday for equity holders the world over.

By midday in London , the FTSE100 index stood more than 5% lower, while the Dax in Frankfurt and the Cac40 in Paris traded almost 7% down.

The market for immediate delivery of Good Delivery Gold Bars meantime slipped below $868 per ounce – an all-time record high when it was first reached on Jan. 8th – and while "there is no reason to be short gold" as Christopher Langguth notes for Mitsui today, forced sales may weigh on the spot price.

Funds and speculators will need to cover margin calls on their record-long Comex gold futures position, as well as covering their stock-market losses.

"There's a weakness across the equities markets," says Alexander Zumpfe at Heraeus, the German refining group, in Hanau . "Some money is leaving the commodities markets – including metals and oil – to cover losses."

Earlier on Monday Australia 's ASX fell for the 11th session running today. Hong Kong lost 5.5% for the day. Taiwanese stocks dropped 6% on average.

The Sensex in Mumbai – where Indian gold buyers have lately begun turning to stock-market investments – lost more than 9% of its value as $190bn of investors' cash was locked out of the market, awaiting allocation in Reliance Power's initial share offering.

"Everyone who wants to buy stocks today, his money is in the Reliance IPO," said Dharmesh Mehta at Enam Securities in Mumbai to the Financial Times earlier. "The market can only bounce back once that money returns in two weeks' time."

Over in Tokyo , meantime, the Nikkei index dropped 3.8% to a new 27-month low while the Japanese Yen reached a three-year high on the currency markets.

"The prospects for a sustained sell-off of the Yen in the current financial market climate of uncertainty remain very slim," says Derek Halpenny at Bank of Tokyo Mitsubishi UFJ.

Citing a reversal of the "carry trade" that saw speculators borrow cheap Yen to invest elsewhere for easy gains between 2001 and 2007, "a new wave of the credit crunch could be upon us and the turmoil continues to have a notable impact on Japan ," he believes – forcing the Yen higher as investors switch into cash.

Japanese investors wanting to Buy Gold today saw the price slip 1.4% – back below ¥3,000 per gram for the first time since Christmas Eve – while the Gold Price in Euros held above €601.50 per ounce.

On the data front, input-price inflation in Germany last month matched Nov.'s 2.5% rate, according to DeStatis.de, while in the UK government borrowing outpaced analyst forecasts by one-tenth.

New data today also said the broad M4 measure of the UK 's money supply grew by 12.3% in Dec., a three-month record. Yet the Bank of England is now widely expected to cut UK interest rates when it next meets in two weeks' time.

The British Pound – already 8% down on its trade-weighted index from the start of last year – this morning dropped more than a cent to reach a nine-month low vs. the Dollar below $1.9500. The Gold Price in Sterling held above £448 per ounce, higher by more than one-third from this time in 2007.

"The UK consumer is buckling under the combined effects of rising food and energy bills, increasing credit costs, flat wages and negative wealth effects from housing and equity markets," reckons Daragh Maher at Calyon Bank.

But it's not only UK consumers suffering strong and sustained growth in the cost of living.

Indra Nooyi, joint chairman and CEO of PespiCo – one of the world's largest food companies – today told The Times of London that "structural inflation for food is here to stay for another two to three years."

The latest drop in world stock markets, however, has forced yet more money into government bonds, pushing yields still further below the current rate of inflation but increasing the pressure on central bankers to cut their target interest rates.

"They're going to be forced to cut rates in spite of worrying levels of inflation, inflation at close to 4% of the standard measure," says Philip Klapwijk of the GFMS consultancy. "And this negative real interest rate I think we'll enter into this year is going to be very powerfully positive for gold."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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