Institutions Dump Stocks for Gold as Confidence in Financial Markets Evaporates
Commodities / Gold & Silver Sep 29, 2008 - 09:59 AM GMTBy: Adrian_Ash
SPOT GOLD BULLION PRICES recovered an early 1% dip vs. the Dollar and leapt against other key currencies on Monday, as a wave of bank failures and emergency rescues across Europe drove Treasury bond prices higher, forcing the yield offered to new buyers still further below the rate of inflation.
World stock markets sank, cutting 3% off European blue-chips and driving Tokyo's Nikkei index towards fresh three-year lows, while the price of crude oil slid more than $4 per barrel to $102.70 amid the panic.
"Despite the [$700bn] US Bail-Out Plan now being committed to paper," said one London analyst to Reuters, "there's hardly a jubilant mood.
"The fact the funds won't be released in one lot but instead in a series of tranches is certainly detracting from its appeal."
Here in the United Kingdom, the government seizure of Bradford & Bingley – a major player in "buy-to-let" investment mortgages – sent London's banking sector plunging as the Chancellor, Alistair Darling, told the BBC that its competitors will now have to fund the shortfall in state-guaranteed insurance of deposit accounts.
The second nationalization of a UK bank in 12 months emptied the government's Financial Compensation Scheme of £12 billion ($21.5bn) – and required an extra £4bn from the Treasury – to smooth the sale of B&B's deposit business to Santander of Spain.
On the currency markets today, the British Pound tumbled to its worst intra-day losses since 1993, down almost 5¢ vs. the Dollar to a one-week low of $1.7960.
The Gold Price in Sterling leapt to a fresh six-month high, up 3.6% in morning trade to stand just 4% off its all-time high of £512 an ounce, reached in mid-March this year.
For French, German and Italian investors, the price of Gold gained 2.9% from Friday's close – touching €619 an ounce as the single currency dropped 1.3% vs. the Dollar – after the near-failure of Belgian-based Eurozone giant, Fortis.
The governments of Belgium, Netherlands and Luxembourg pumped €11.2 billion into the banking and insurance group, taking a 49% stake in return.
Germany's second-largest commercial real estate lender, Hypo Real Estate, secured a fresh line of €35 billion in government and emergency bank credit. Its stock sank 61% on the news.
The Icelandic Krona dumped almost 7% against the US Dollar after the Reykjavik government bought a 75% stake of Glitnir, the country's third-largest bank.
America's sixth-largest bank, Wachovia, was said by the New York Times to be seeking a sale to Citigroup or Wells Fargo.
"Institutional investors and private banks in particular will all be reconsidering their strategy. My belief is they are likely to want to own some gold again," said Jeremy Charles, head of precious metals trading at HSBC and chairman of London Bullion Market Association , to Reuters earlier.
Speaking at the LBMA's annual conference – this year held in Kyoto, Japan – Charles told the newswire that he sees only a 10% potential drop in Gold Prices right now, with " far greater potential on the upside.
Pointing to the Gold Coin Shortage that's hit retail gold investors worldwide since July, "the [soaring] premiums around the world tell a big story to me," he went on.
"The recent dip in the Gold Price has created massive demand from the retail investors."
Meantime in the paper promises of Gold Futures and options, speculative gold traders are being forced to close their positions due to the dearth of credit and surging financing costs.
Open interest in Comex gold contracts shrank by 6.5% in the week to last Tuesday, according to US regulator the Commodities Futures Trading Comission (CFTC).
The latest data also shows that hedge funds and other "large speculators" – hit by soaring financing costs and margin requirements as financial credit dries up – grew their long positions by just 6% as the price leapt $110 per ounce between 15th and 22nd Sept.
Previously taking their most "bearish" stance overall so far this decade early this month, hedge-fund and institutional traders were forced to slash their short position by a massive 37% as the Gold Price jumped from $780 to $890 an ounce.
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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