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Gold Plunges after Yen Move, Useless CDS Would Mean Much Higher Sovereign Debt Exposure

Commodities / Gold and Silver 2011 Oct 31, 2011 - 07:13 AM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleU.S.DOLLAR gold bullion prices on the spot market dropped sharply to $1708 an ounce Monday morning – a 2.2% fall from Friday's close – while stocks and commodities also fell and the US Dollar gained following Japan's intervention aimed at weakening the Yen.

Gold bullion prices then rallied as the morning went on, hitting $1725 per ounce by lunchtime in London.

"The huge spike in the Dollar is pressuring gold prices," says Ong Yi Ling, analyst at Phillip Futures in Singapore. 

"But so long as gold stays above $1,700, the sentiment should remain pretty bullish."

Silver bullion fell to $34.18 per ounce – 3.3% down on Friday's close – remaining around that level for the rest of the morning.

On the currency markets, the US Dollar gained 5% against the Yen immediately following Tokyo's action. By Monday lunchtime, however, the Dollar had slipped back by 2.1%.

In Europe meantime, "bold decisions are needed from the G20 leaders meeting in Cannes this week to get the global economy back on track," says Angel Gurria, secretary general of the Organisation for Economic Co-operation and Development.

"In most countries we see some very worrying political trends," notes Laurence Parisot of French business lobby Medef.

"Inward-looking, beggar-my-neighbor policies benefit no one," says British prime minister David Cameron, writing in the Financial Times.

"We have to push for a more balanced world economy, where countries like the UK do better at saving and investing and restoring their competitiveness."

M4 money supply in the UK fell 1.7% in September, figures released by the bank of England on Monday show. Lending to the real economy, according to the Bank's measure, fell by £6.4 billion, compared to an average monthly decrease of £3.9 billion over the previous six months.

Lending to individuals, by contrast, rose by £1 billion last month, with consumer credit growing £0.6 billion – to show an increased annual growth rate of 2.5%.

The Bank announced this morning that it will no longer release these data monthly, and will instead move to quarterly publication.

On the bond markets meantime, yields on Italian 10-Year Treasury bonds hit 6.15% this morning – briefly showing a spread of over four percentage points compared to German bunds.

Italy had to offer yields of over 6% when it auctioned €7.9 billion of longer-dated bonds on Friday – the highest rate it has paid as a Eurozone member.

Elsewhere in Europe, plans to avoid triggering credit default swaps in the event of a Greek default have raised questions over whether banks using CDS – which act as a form of bond insurance – to hedge their sovereign exposure are now less protected than they thought, news agency Reuters reports.

CDS pay out if there is a "credit event", usually taken to include a default. However, it remains unclear whether a deal on Greek debt – such as the 50% haircut for private creditors agreed last week – would be viewed as voluntary, and if so whether it would then constitute a credit event.

"People talk about Greek CDS triggering being destabilizing, when it's really the opposite," Reuters quotes one global credit trading head at a major European bank.

"If there is a 50% haircut and it's voluntary, then my worry is all my sovereign CDS protection in Europe is useless, and my net exposure is much higher."

British bank Barclays cut its exposure to Eurozone sovereign debt by 31% during the third quarter of this year, according to results published Monday.

Over in New York, the net long position of bullish minus bearish gold futures and options contracts held by noncommercial – so-called 'speculative' – traders on the Comex exchange jumped 5.2% in the week ended 25 October.

"Given that this week's improvement merely erases the deterioration of the previous week, the speculative market still appears to be cautious about gold's short-term prospects," warns Marc Ground, commodities strategist at Standard Bank.

Over the same period, the gross tonnage of gold bullion held to back shares in the SPDR Gold Trust (ticker GLD) – the world's largest gold ETF – rose by 16 tonnes, though the GLD has seen a small outflow of less than one tonne since last Tuesday.

In China meantime, JPMorgan Chase Bank (China) has received approval to become a member of the Shanghai Gold Exchange.

Writing in the London Bullion Market Association's 'Alchemist' newsletter in 2009, Tim Wilson, JPMorgan's managing director and head of Asia marketing of commodities, asked whether an Asia initiative should be "an agenda item on every LBMA committee".

"The number of debates and articles about transforming the LBMA into the International BMA are too numerous to recount, but discussion has rarely been translated into action," he said.

"We as Market Makers and Members should be embracing the opportunity to cement our position as the pre-eminent gold trading platform, to expand and promote the benefits associated with the highly accredited, reliable and international LBMA Good Delivery List."

By Ben Traynor

Gold price chart, no delay   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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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