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Gold Slides as Global Stock Markets Soar

Commodities / Gold & Silver Oct 14, 2008 - 08:55 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES slid from an overnight rally as the US opening drew near on Tuesday, trading 3% lower against most major currencies from this time last week while world stock markets continued to leap thanks to the promise of almost $2 trillion in tax-payers' money.

The Japanese Nikkei index leapt a record 14% on the day, recovering just over half of last week's huge losses.


Germany's Dax and France's Cac40 index both added to Monday's 11% record bounces, meantime, while one newspaper claimed that "[Chancellor] Angela Merkel saves Germany" and President Sarkozy was praised for arranging a pan-Eurozone bail-out costing €300 billion.

The Frankfurt and Paris bourses remained 8% below last week's opening levels, however.

"There's relief that banks probably won't go bankrupt thanks to the capital injection plans," says Koichi Ogawa at Daiwa SB Investments in Tokyo, speaking to the BBC online .

"But after rebounding to some extent, we will inevitably enter a phase of thinking about how these steps will actually impact the global economy."

Here in the UK today, the government said growth in consumer prices hit a 16-year record in Sept., surging to 5.2% year-on-year.

Last week the Bank of England joined the US Federal Reserve and European Central Bank (ECB) in cutting its interest rates by 0.5%, taking the real rate of interest after accounting for inflation well below zero for the first time since Nov. 1980.

"The financial crisis, which is spreading seemingly inexorably from region to region and sector to sector, is not unalloyed good news for Gold ," says the latest Precious Metals Monthly from the analysts at Virtual Metals here in London.

"Deleveraging, a flight to cash or Treasury bonds, and the gains in the Dollar, all work against gold in the short-term.

"But the medium-term consequences seem only bullish. The Federal Reserve and other central banks are pumping billions of dollars of liquidity into the system, ignoring any inflationary consequences, whilst the lack of trust in financial assets boosts the case for something simple and tangible such as gold."

The US Treasury is widely expected to pump $250 billion into the nine largest American banks today, part-nationalizing them in line with the suddenly much-admired policy of Gordon Brown, the British prime minister.

"Luckily for the world economy, Gordon Brown and his officials are making sense," wrote new Nobel laureate Paul Krugman of the UK's part-nationalization of the country's three largest banks.

"They may have shown us the way through this crisis," he believes, neglecting the Brown administration's part in creating this mess through low interest rates and feel-good politics between 1997 and 2007. ( Get the full story on Gordon Brown's True Achievements here... )

Last night saw the Bovespa stock index in Brazil gain 11% for the day after the government eased cash reserve requirements and effectively pumped $46 billion into local banks.

Mexican stocks also rose 11% on average, while the Peso also rallied hard against the US Dollar.

The greenback also tumbled against the British Pound – down more than 5% from Friday's five-year top – and slipped to $1.3750 against the Euro.

The Japanese Yen also tumbled after gaining 30% vs. the Euro during Aug. and Sept.

Despite the flood of government cash and the flood of money back into shares, however, "interbank interest rates for lending longer than a week remain stubbornly high," notes Walter de Wet for Standard Bank in Johannesburg, "highlighting the major breakdown in market functioning.

"[So] while better-performing equities could dim gold's luster, these lending problems should continue to support the metal until interbank conditions beyond a few days improve."

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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