London Gold Market Report – Forex Hound

SPOT GOLD PRICES sat tight in a $6 range early Wednesday, bouncing 1.3% below yesterday’s new record high before recording an AM Fix in London of $923.75 per ounce as the world’s stock markets ticked lower in quiet trade.

London Gold Market Report
from Adrian Ash
07:45 EST, Weds 30 Jan.
Gold Sits Tight Ahead of US Fed’s Rate-Cut; Asian Stocks Slip & Crude Oil Rises as Sub-Prime Losses Continue to Mount
SPOT GOLD PRICES sat tight in a $6 range early Wednesday, bouncing 1.3% below yesterday’s new record high before recording an AM Fix in London of $923.75 per ounce as the world’s stock markets ticked lower in quiet trade.

"All eyes today are on the upcoming US rate decision," says Brandon Lloyd for Mitsui in Sydney, "widely expected to lower rates again to support the aggressive 75-basis point emergency cut last week.

"There is a 75% chance of a 50 basis point cut already priced into the market and anything but this amount would now be a surprise."

Shanghai’s stock market fell 0.9% this morning to reach a six-month low as heavy snow brought much of China to a standstill. Aluminum prices, on the other hand, jumped the most in 16 years as power cuts caused by the storms knocked out one quarter of China’s smelting output.

Crude oil rose for the fifth session running, meantime – its best run since Oct., according to Bloomberg – ahead of today’s US Federal Reserve announcement at 14:15 EST. But the promise of cheaper money to come failed to stop the broad MSCI Asia-Pacific index losing 1.2% for the day.

Japanese gold futures in Tokyo also slipped, giving back 0.2% of yesterday’s new quarter-century record vs. the Yen to equal $926.59 per ounce.

"There has been some talk about restarting gold mines in South Africa," said Dan Smith at Standard Chartered to Reuters today after Eskom – the state-owned utility – agreed to raise the proportion of power supplied to gold miners from 70% to 90% following last week’s shutdown.

The world’s second-largest gold producing nation, South Africa has seen its annual output more than halve over the last decade. But for the Gold Market, "the Fed meeting is going to be critical," Smith believes.
"The previous 75-basis point cut gave the impression that the Fed is panicking, which encouraged a lot of interest in gold as a safe-haven.

"If the Fed is seen overdoing and panicking, then it’s likely to push gold up again."

Urging Ben Bernanke’s team to slash rates still further was news on Tuesday that home prices in the ten largest US cities fell by a record 8.4% in the year to November. The Federal Bureau of Investigation (FBI) is meanwhile investigating 14 companies for accounting fraud and insider trading related to subprime mortgage-backed bonds.

Twenty-six firms are already being sued by the New York authorities and their pension funds after underwriting home-loan securities issued by Countrywide Financial, America’s largest mortgage lender. And today UBS – the world’s largest wealth management group – admitted an extra $4 billion in new write-downs, taking the Swiss bank’s total subprime-related losses so far to $18.4bn.

"One could become very emotional about UBS," smirk analysts at J.P.Morgan in a note – "continuously behind the curve in write-downs and hence always topping-up; exposure disclosure is poor to new write-downs; and management leadership [is a] vacuum."

Shares in UBS have now dropped by 40% on the Zurich stock market, but J.P.Morgan itself reported a 34% fall in fourth-quarter profits after writing down $1.3bn of its subprime investments.

"Until recently," writes Bill Gross, head of Pimco – the Californian bond fund with $720 billion under management – in his February Outlook, "US and therefore global demand has been driven by the ability to lower interest rates and extend credit to an increasing majority of Americans.

"[The trend] was bolstered and supported by innovative, securitized finance which in turn was nurtured by lax regulation and a belief that things could not go wrong.

"Now government spending needs to fill the gap," says Bail ‘Em Out Bill – "not consumption. Writing [tax rebate] checks for American consumers which then flow to foreign central banks [via the trade deficit] is not the permanent solution."

Currency traders sided with Gross’s view this morning, pushing the Euro up to a 10-session high vs. the Dollar of $1.4815, while the British Pound – ignoring news that new UK mortgage approvals fell to a 13-year low in Dec. – rose to a new five-week high above $1.9940.

Bank lending to City stock-brokers, hedge funds and other finance companies, on the other hand, leapt by more than one-quarter in the year to last month.

The Gold Price in Sterling today held below £464.50 per ounce, while French, German and Italian investors wanting to Buy Gold today saw the price drop 1.2% from Tuesday’s new record high to near €622.

"Although fresh central-bank gold sales from Portugal and Belgium are possible in 2008," says today’s Official Sector Gold Activity report from GFMS on behalf of SocGen, "their combined volume would probably be limited and insufficient to prevent a significant shortfall from the 500-tonne CBGA limit."

Western Europe’s central banks agreed in 1999 to limit their annual sales of Gold Bullion, and they only just under-shot their quota in the year-to-Oct., led by a sale of 240 tonnes from the Banco de Espana.

"Spain was left with a little more than 280 tonnes at end-Dec.," the GFMS report goes on, noting that further sales are unlikely after 2007’s reserve reduction "created quite a lot of controversy in the country, particularly in the light of subsequent increases in Euro gold prices."

On the other side of the ledger, winks the report’s author – and most likely referring to China, Russia and the Middle Eastern authorities – "gold purchases that take place [in 2008] will probably come from certain central banks seeking to diversify away from the US Dollar, be that due to the latter currency’s bleak outlook or to political motivations.

"It should be noted here though, that as gold remains close to all-time highs some of the potential buyers could decide to postpone purchases until a correction has taken place."

Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2008
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