Gold Bull Market to be Boosted by Paralysed Central Banks
Commodities / Gold & Silver Sep 04, 2008 - 10:40 AM GMTBy: Adrian_Ash
SPOT GOLD PRICES gave back half of a 1.6% rally at lunchtime in London on Thursday, trading at $809 per ounce as crude oil prices rose and global stock markets fell once again.
Asian-Pacific equities slid for the fourth day running, while German stocks stood 0.8% lower after the European Central Bank (ECB) kept Eurozone interest rates on hold at 4.25%.
Only the FTSE index of UK shares bucked the trend, adding three-quarters of one per cent after Sterling interest rates were kept on hold for the fifth month running.
The Bank of England – just like the US Federal Reserve – remains caught between a double-digit fall in house prices on one side, but a record surge in food and other basic living costs on the other.
British investors trying to take cover from the resulting Destruction of UK Cash Savings today saw the Gold Price in Sterling touch a three-session high of £457 per ounce.
" Gold traded down to $790 again yesterday," notes Mitsui, the London bullion dealer, "as the stronger US Dollar weighed on the precious metals complex.
"Importantly though, this level held and the market rallied back up to close above $800. Physical buying has once again appeared to have stepped in and offered support."
Yesterday UBS of Switzerland – one of the world's very largest Gold Bullion dealers – confirmed that its vault staff have recently been "as busy as at any time over the past 20 years."
Demand from India – the world's No.1 gold consumer – is "running at 5-10 times the average of 2007 levels," the bank added.
Today analysts from J.P.Morgan forecast a 10% gain in world Gold Prices by Christmas – typical of the Sept. to Dec. period over the last decade – driven by the Indian festival season which culminates on Oct. 23rd with Diwali, the Hindu festival of light.
Gold imports to India jumped by 45% last month, according to the Bombay Bullion Association, reaching a new record of 100 tonnes. ( See the true impact of Indian Gold Demand here... )
" Gold has held up pretty well given the stiff head winds it's been facing in terms of the Dollar's rally," said Daniel Smith at Standard Chartered to Thomson-Reuters today.
"While limited investment demand has pushed prices down, strong physical demand globally is proving supportive."
Over in Frankfurt , Germany meantime, the ECB's interest-rate decision – coming after the Euro plunged 10% vs. the Dollar since mid-July – set up currency traders for the crucial afternoon press conference.
"Investors must pay attention to [ECB chief] Trichet's comments for clues on the trajectory for rates," as Manqoba Madinane notes for Standard Bank in Johannesburg, "especially in light of growing downside risks to Eurozone economic growth.
"Dovish comments could see the greenback rally again – which could mean more downside risks for precious metals," says Madinane.
The correlation of daily moves in the Gold Price with the Euro/Dollar exchange rate reached a near-perfect 0.98 at the end of last month, according to data from Reuters, rising from the 12-month correlation of 0.86.
The third asset bought by Dollar-panicked investors since 2002 – crude oil – now shows a daily correlation of 0.90 with the Euro/Dollar, says Bloomberg.
Today Germany factory orders were shown to have slipped by 1.7% month-on-month in July.
"Easing financial market systemic risk [also] means further downside risk for precious metals," Madinane goes on.
"Note that the spread between the generic US two-year swap and government bond yields has broken below 100 basis points after climbing as high as 121 bps since the start of the US credit market crisis."
This easing in money-market tensions "could crimp safe-haven investment fund flows into precious metals," he believes.
Besides setting interest rates for the 350 million citizens of the 15-nation Eurozone, however, the ECB's executive committee was also set to discuss the end of its emergency "liquidity support" for the region's banks today.
Since the start of the global credit crunch in Aug. '07, less than 3% of all new asset-backed securities issued by European investment banks have been placed with open-market investors, according to The Economist .
The rest – worth some €202 billion (US$293bn) – was accepted by the ECB as collateral against emergency loans of government bonds.
Indeed, "a large number of banks have designed ABS tranches, backed mostly by mortgages, purely for ECB consumption," as The Economist reported in June. Mortgage-backed bonds issued against Spanish property, for example, have relied almost entirely on the ECB's special lending scheme.
Today the bond-rating agency Moody's slashed Spanish debt backed by consumer loans from "stable" to "negative", citing "increased pressure" as the nation's economy grows at the slowest pace since 1993.
By Adrian Ash
BullionVault.com
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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
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