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Gold Near 6-Week High as Bond-Insurer Defaults Hit Court

Commodities / Gold & Silver 2009 May 14, 2009 - 01:39 PM GMT

By: Adrian_Ash

Commodities

THE SPOT PRICE of gold ticked $5 lower from yesterday's 6-week high early in London on Thursday, holding flat for non-Dollar investors as world equities fell and the US currency bounced on the forex market.


New data showed US factory-gate prices rising 0.3% month-on-month in April. Both initial and continuing jobless claims for last week rose sharply ahead of expectations.

US crude oil futures meantime dropped 2% to $56.90 per barrel, while government bond prices rose, pushing 10-year US Treasury yields down to a two-week low of 3.04%.

"Gold is currently just above last week's high," says Scotia Mocatta in a client note today, "[but] it quickly ran out of steam after trading through $930.00 as dealers took profit, pushing it lower.

"Perhaps it is just a question of time before gold jumps higher. Our bullish gold view has been working in what has been a low volatility environment."

The London market-maker repeats its short-term target of $966 per ounce, with a trailing-stop now at $906. Standard Bank's commodity team today pegged gold support between $917 and $920, with resistance at $930 and $938.

"Gold Prices have been stabilising at relatively high levels, slowing fresh investment," said a Japanese smelting-group's trader to Reuters this morning.

Tokyo Gold Futures closed Thursday ¥38 lower per gram at ¥2,857, down 1.6% from Monday's opening but 42% above last Oct.'s three-year low.

"For Gold Prices to break above recent ranges," the trader added, "there has to be some fresh news about economic turmoil."

Today the Belgian government offered to guarantee 90% of a possible €15 billion loss at banking and insurance group KBC, hit by a €3.6bn loss for Jan-April on derivatives linked to MBIA – the US "monoline" bond insurance company which in turn underwrites KBC's own investments.

Yesterday 18 large financial institutions filed a law-suit against MBIA in New York, accusing it of illegally avoiding its commitments after the global credit crisis of 2008.

Last month, Wells Fargo filed a complaint against bond insurer XL Capital Assurance after it missed $5.5m of payments.

"There are investors out there who rely on the payments from bond insurers," the FT today quotes a 'source'.
"Now that one bond insurer has stopped paying, they are worried that others will, too. It is causing a lot of concern."

Here in London last week, Barclays Bank – which has not applied for any state-aid to date – said it expects insurance payments to cover 76% of its "impaired assets".

Yet Royal Bank of Scotland – now two-thirds owned by the UK tax-payer – believes its insurers will cover only 35% of its losses.

A British subsidiary of monoline bond-insurance giant Ambac Financial is meantime seeking $1 billion in damages from investment bank J.P.Morgan, accusing it of buying "inappropriate securities" with Ambac's money, including high-risk mortgage-backed securities.

"It's a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100 billion of the $700bn TARP funds," said Mark Patterson, chairman of distressed private-equity firm MatlinPatterson Advisers at a conference in Qatar yesterday.

"The taxpayers ought to know that we [as distressed-investment buyers] are in effect receiving a subsidy. They put in 40% of the money but get little of the equity upside."

Meantime in Detroit, auto-makers Chrysler and General Motors were reported to be dropping 3,000 dealerships between them, around one-third of their total network.

In the UK, telecoms group BT today announced 15,000 job losses and a 60% cut to its annual dividend.

Japanese consumer electronics giant Sony Corp. today reported its first annual loss in 14 years at ¥98.5 billion ($1bn).

"By illegally subsidising its exports through the undervaluation of its currency," say the sponsors of a new bi-partisan US bill, "China has distorted their gains from trade, created barriers to free and fair trade, harmed US industries and destroyed millions of US jobs."

Aiming to impose import tariffs against Chinese goods, the bill alleges that the Chinese Yuan is 40% over-valued vs. the Dollar, swelling the US trade deficit and helping Beijing accumulate more than $1 trillion in US Treasury debt.

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.

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