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Gold Slips as Full Nationalization of Western Banks Beckons After Fresh Record Losses

Commodities / Gold & Silver 2009 Jan 19, 2009 - 10:40 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE of wholesale gold bullion slipped early Monday in London, dipping 1% to $837 an ounce as European stock markets reversed an early gain despite a fresh flood of tax-payers' money to the financial sector.

Both the US Dollar and Japanese Yen bounced on the foreign exchanges, while crude oil slipped back to $35 per barrel.


Last week Opec member Angola claimed that the oil cartel "will not hesitate to meet and agree a further round of [output] cuts" if prices continue to slide.

US markets remain closed today for Martin Luther King Day.

"All the talk is on deflation at the moment, which is negative for gold," reckons Lin Yuhui, head of research at China International Futures in Shenzhen, speaking to Bloomberg.

"Perhaps in the later part of the year, when inflation starts to pick up again, gold will once again find favor with investors," he believes.

The real purchasing power of Gold Bullion more than doubled for both US and British investors during the long deflation of the late 1930s.

Japanese investors saw the value of gold more than double inside eight years after the Bank of Japan adopted a "zero interest rate policy" in its failed bid to defeat the deflation in real estate and stock market prices that began in 1990.

Tokyo Gold Futures jumped 3.1% this morning as Japanese traders caught up with Friday's sharp bounce in London and New York quotes.

"Japan's industrial production for November, released this morning, contracted 16.6% year-on-year," notes Walter de Wet for Standard Bank in Johannesburg – accelerating the rate-of-decline from Oct.'s figure and proving "bearish for platinum-group metals" used in auto-catalysts.

"Economic data will pick up later this week," de Wet goes on, pointing in particular to China's retail sales data.

"The Chinese consumer has seemed immune against the global downturn, with growth rates in sales around 20%. [But] with China of growing importance for the jewelry market," he adds, looking ahead for Gold in 2009 , "a downturn might signal a further slowdown in jewelry demand."

Today in India – destination for one ounce of gold in every five sold worldwide – "demand has turned dull after the Gold Price shot up on Friday," said Pinakin Vyaas, head of treasury at IndusInd Bank in Mumbai, to Reuters this morning.

Local gold supplied via India's scrap market was quoted 1.5% below the main market's two-week high of 13,000 Rupees per 10 grams.

Over in the US Gold Derivatives Market , hedge funds and other large speculators trimmed their long positions last week, new data showed after Friday's close in New York.

The "bullish ratio" comparing long and short contracts held by institutional traders ticked lower from early Jan.'s 11-month record of 91.2%.

Commercial traders, in contrast – acting for refineries, mints, wholesalers and bullion banks – grew their long positions to an 8-week high, pushing their "bullish ratio" up to 32.1%.

Eighteen out of 32 professional traders and analysts surveyed by Bloomberg News late last week advised Buying Gold , the newswire says.

Ten professionals advised selling, while four were neutral. Over the last 5 years, Bloomberg's survey has proven accurate 59% of the time.

Back in Monday's action, long-dated government bond prices fell worldwide –pushing the 10-year German bund yield 0.8% higher to breach 3.0% – as governments everywhere announced a flood of rescue packages for the financial and banking sectors.

The British government pledged a fresh £50 billion ($73bn) to shore up the capital base of UK banks, and also raised its stake in Royal Bank of Scotland to 70%.

RBS today warned of a £28bn loss for full-year 2008 – the greatest loss in UK corporate history – plus a further £20bn write-down after its ill-advised and over-priced acquisition of Dutch bank ABN Amro in Oct. 2007.

Shares in RBS dumped over 50% on the news – and stood more than 97% below the top of March 2007, with spread-betting brokers briefly refusing to quote a price – while the FTSE100 index went sharply negative from an initial 1% rise.

The British Pound sank 3¢ against the Dollar on the currency markets, and cut last week's bounce from record lows vs. the Japanese Yen in half.

The Gold Price in Sterling held above last Friday's finish at £572 per ounce.

"This incremental approach [to bailing-out the banks] is stalling," says the Financial Times ' Lex column, "and with every lurch, the US and UK are heading down the road marked 'Full Nationalisation'."

"We're now nationalizing banks one at a time," agrees Roy Smith, professor at the Stern School of Business in New York, after Bank of America and Citigroup both turned to Washington for assistance on Friday.

"The real question is, will the biggest ones need to be nationalized?"

Germany's financial watchdog, BaFin, reckons the nation's banks still hold €300 billion ($395bn) of toxic debt-related investments.

Denmark today offered to lend its major finance houses a further 100bn Kroner ($18bn) at interest rates of up to 10%.

In the United States, the incoming Obama administration has already vowed to ban banking-stock dividend payments until all tax-funded aid is repaid, scaring off private investment and forcing a fresh plunge in banking stocks.

The total capital shortfall across America's banking sector may now run "from $700 billion to more than $2 trillion" reports the New York Times .

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 2009

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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