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Gold Bounces on Record US Gasoline Prices and Credit Crisis

Commodities / Gold & Silver Apr 09, 2008 - 12:07 PM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES slid into the London opening on Wednesday, reaching a four-session low of $903.60 per ounce before bouncing 1.4% to recover the day's losses on news that US gasoline prices have reached a new record high for consumers.

The average price of regular unleaded has now risen to $3.343 per gallon according to the AAA survey, almost 20% higher from this time last year.


International commodity prices meantime reversed an earlier 0.5% fall, while the US Dollar fell on the currency markets and Wall Street stocks opened lower from Tuesday's close.

"The subprime crisis presents a strong case for gold," said Philip Klapwijk, head of the GFMS consultancy, at the launch of the group's Gold Survey 2008 today in London .

Pointing to growing risk aversion amongst investors, negative real rates of interest on the US Dollar, and sharply falling earnings from S&P equities, Klapwijk also noted a hitherto overlooked threat – a "sharp deterioration" in the United States ' fiscal position as a result of "the Federal Reserve's largesse" in bailing out Wall Street banks.

"We've been told by pension and other institutional investors that they've been looking at Gold for a long time," Klapwijk said.

"Now they've taken a position – or they're just about to – they say they won't be distracted by short-term moves in the price."

Stock markets drifted lower in Asian and early European trade on Wednesday, losing 5.5% in Shanghai to end a four-day rally and slipping 0.5% in Frankfurt despite confirmation of 2.2% economic growth across the Eurozone for 2007.

Government bond prices rose everywhere bar Japan on a downgrade to world economic growth forecasts from the International Monetary Fund (IMF) in Washington .

The IMF today called the current banking crisis "the largest financial shock since the Great Depression."

In Tokyo , however, the final appointment of Masaaki Shirakawa as Bank of Japan governor by the Japanese parliament dented hopes of further rate cuts from the current 0.5%.

Research from J.P.Morgan says the Tokyo bond market now puts the chance of lower Yen interest rates by end-Dec. at 42%, down from 70% three weeks ago.

German bunds, in contrast, now point to a rate-cut of 0.25% in European interest rates by July.

Traders betting on US interest-rate futures in Chicago now see a 42% chance of a half-percent cut on 30th April, up from 24% this time last week according to Bloomberg.

"There seems to be value in the stock market at these levels, but there's a disbelief in the rally and, therefore, selling comes at the higher levels," said one Indian strategiest to Reuters earlier.

"I think we are still 10% to 15% away from the bottom."

Today the Sensex benchmark index lost 0.4% in volatile trade, while Indian Gold Prices bounced from a near 0.6% drop to 11,770 Rupees per 10 grams.

In Tokyo , Japanese gold futures closed 1.5% lower, slipping back below ¥3,000 per gram – the 23-year high first breached in Nov. 2007.

"Concerns about IMF Gold Sales are giving psychological pressure to the market, limiting the topside of gold," reckons Shuji Sugata at Mitsubishi Corp. Futures & Securities in Tokyo .

"The market is also reluctant to Buy Gold actively on price gains given the recent recovery in the Dollar."

Wednesday's economic downgrades from the International Monetary Fund (IMF) mark the 60-year old institution's third big announcement in as many days.

On Monday this week the managing director, Dominic Strauss-Kahn, noted the 60-year old Fund's relevance amid the current global banking crisis, calling for concerted cross-border intervention.

On Tuesday the IMF laid out plans to re-organize its own finances, Selling 400 Tonnes of Gold reserves to help cover a $400 million deficit in its $1 billion budget.

(Agreeing with BullionVault's analysis, the GFMS consultancy believes the IMF sale will add nothing to total government gold sales, working instead within the Central Bank Gold Agreement first signed in 1999.)

Now the IMF warns that total losses from the international credit crunch (or Solvency Slump?) may reach $945 billion as "financial markets remain under considerable stress," according to Jaime Caruana, head of the Fund's Monetary and Capital Markets Dept.

"It is now widely acknowledged that public measures are needed in a number of areas," claims the IMF – established at the end of World War II to help run the reconstruction of Germany and Japan .

"In particular, there may be a need to shore up the prices of various types of securities to prevent fire sales."

Such "shoring up" from the Federal Reserve when it helped sell Bear Stearns to J.P.Morgan – as well as the Fed's ongoing loans to brokerages and investment banks – took it "to the very edge of its lawful and implied powers," said former Fed chairman Paul Volcker in a speech yesterday, "transcending in the process certain long-embedded central banking principles."

The current outlook reminds him of nothing more than the early 1970s, the 80-year old economist told his audience at the Economic Club of New York – a time when commodity prices rose sharply but the warning signs of broader, entrenched inflation were ignore.

Asked if he still forecast a crisis in the US Dollar in the near future, "you don't have to predict it. We're in it," said Volcker.

Today at the GFMS gold seminar in London , Philip Klapwijk reported "healthy growth" in large institutional investors moving into physical Gold Bullion Investment as they seek to avoid the risk of counter-party default on so-called 'unallocated' ledger entries and gold futures contracts.

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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