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Gold Leaps to $905 as FBI Arrests Bear Stearns Hedge Fund Managers

Commodities / Gold & Silver Jun 19, 2008 - 09:18 AM GMT

By: Adrian_Ash

Commodities

SPOT GOLD PRICES leapt against all currencies at the US open on Thursday, surging to a four-week high above $905 per ounce on what looked to be one or more large New York orders amid an otherwise quiet market.

Crude oil bounced from an overnight dip as the US Dollar ticked gently lower on the forex market and energy-giant Shell closed 200,000 barrels of daily production in response to militant attacks in Nigeria .


In New York , two former Bear Stearns fund managers were arrested on charges of securities fraud charges.

"We hold our one month forecast for Gold at $900," says John Reade, head of metals trading at Swiss bank UBS, today.

"Although we believe gold is set for a big move, we are unsure of which direction. While the market remains above the 200-Day Moving Average we remain cautiously bullish.'

"Credit spreads widened," notes Manqoba Madinane for Standard Bank in Johannesburg of yesterday's 0.8% gain in the Gold Price . "That indicates US credit markets are coming under strain.

"As a result, equity markets might come under pressure, enhancing the relative attractiveness of commodities."

Indeed, "as inflation psychology becomes more and more embedded and people become desperate to have a source of value," said Christopher Wyke, a commodities analyst for the $277bn Schroder funds, to a Hong Kong conference today, "you could easily see for the next several years that prices rise not to $1,000 an ounce, but prices rise to $5,000 an ounce or beyond."

In March, Wyke forecast Gold Prices of $1,200 to $1,500 per ounce within 12 months. Noting today that two-thirds of the world's population face price inflation above 10% per year, Wyke says central banks will now become net buyers of gold for the first time in two decades in 2008.

The move will be led by developing countries trying to defend the value of their export-earned currency reserves, Wyke is quoted by Bloomberg .

World Gold Mining Output , meantime – which fell to seven-decade low in 2007 – continues to slip lower, with South Africa , the former world No.1, reporting a 10% fall in April's production from the same month last year.

Since 1998 South Africa 's annual gold-mining output has halved. Adding to the pressure on mine operators today, the National Energy Regulator (NERSA) announced that Eskom, the state-owned power utility, can raise its electricity prices by an average of 27.5%.

"Rising electricity costs will increase the cost of [mining] production," says an emailed comment from Walter de Wet at Standard Bank. "Many mines remain dependent on Eskom for their energy needs."

Of greater concern, however, "is the [actual] electricity supply to mines" he believes. A power outage closed South Africa 's entire mining industry for five days in January.

On the data front today, Canada reported a jump in consumer-price inflation from 1.7% to 2.2% annually, while new US jobless claims for last week came in ahead of expectations at 381,000.

Here in London , retail sales in May were reported 8.1% greater than the same month last year, led by a 9% jump in clothing sales.

The British Pound surged to a one-week high above $1.9700 on the news, but the jump in gold still pushed the Gold Price in Sterling up to a three-week high of £458 per ounce.

Warning that the Bank of England is likely to raise interest rates in a bid to quell price inflation, "today's very strong set of retail sales numbers suggests that, despite all the doom and gloom, the UK consumer continues to shop," says Ian Kernohan at Royal London Asset Management.

"Unfortunately this 'shop till we drop' attitude will sow the seeds of its own demise."

With London's banking sector under siege from short-sellers looking to profit as finance shares continue to fall, little-seen data from the Bank of England today showed UK lenders buying back £4.6 billion ($9bn) of securitized debt which they'd previously sold to investment funds.

Taking these debts back onto their balance-sheets, the banks' new net lending to UK consumers and business sank by more than 99% in May from April, reaching its lowest monthly total since Oct. 1997.

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.

Adrian Ash Archive

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