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Gold Holding Pattern - Economy-Wide Crunch" Now Looming in Europe

Commodities / Gold & Silver Nov 30, 2007 - 08:46 AM GMT

By: Adrian_Ash

Commodities

THE SPOT GOLD MARKET slipped from a small overnight bounce early in London on Friday, recording an AM Fix that was 5% below Monday's start as world equity markets rose on the promise of fresh interest-rate cuts from the US Fed.

Looking at the latest data on Gold Market futures – where the front-month contract is now trading $50 below its near-record top of Nov. 8th – "the net long Comex position declined by 12.4% in the two weeks" to Nov. 20th, note the team at Mitsui.


"This liquidation was propped up by a 50% increase in the Japanese general public's position on the Tocom exchange," they add, but the total number of contracts held open on US gold futures yesterday dropped by another 3%, "highlighting the closing of positions" according to ScotiaMocatta

The Gold Price , however, "continues to seem comfortable in its recent range of $773.10 to $845.84," the metal brokers believe. Only "a break to either side will foreshadow the next move.

"In the near-term, technicals have once again turned more bearish, but considering the numerous false signals we have been given recently we are cautious. Support comes in at historical congestion of $781.65; resistance comes in at the 21-day moving average at $807.40, followed by intraday congestion at $808.02."

In Tokyo today the Nikkei stock index closed 166 points to the good, finishing the week nearly 5% higher after Ben Bernanke – chairman of the US Federal Reserve – said in a speech last night that he "will have to remain exceptionally alert and flexible."

Taking Bernanke's comments as code for "cheap money ahead", Asian stock markets ended today at a two-week high on average. Crude oil held flat, meantime, trading around $91 per barrel as the Canadian pipeline damaged by fire yesterday morning was scheduled to come online "within days".

London 's FTSE100 index rose 0.7% by late morning, and the Dax in Frankfurt traded more than 2.6% above Monday's opening level.

"Weaker oil prices are one of the reasons for the Gold Market 's decline," reckons Alexander Zumpfe of Heraeus, the global refining group, in Hanau , Germany .

"I expect gold to go down to $790 an ounce."

For the first time since June, gold investors are likely to end today without recording a gain for the month. US government bonds, on the other hand, are nearing their best monthly finish since 1995.

A basket of Treasuries would have returned 3.2% this month, according to Merrill Lynch data. Spot Gold Prices are currently holding just shy of break-even.

Eurozone government bonds have also shot higher this month, putting in their best performance since early 2004 as Europe's interbank lending market has "gone mad" according to Il Sole 24 Ore , the Italian financial newspaper.

The surge in European bond prices has now pushed the yield offered to new buyers of Germany 's two-year bunds down 31 basis points to 3.74%. So far during the global credit crisis, however, the European Central Bank has continued to hold its key interest rate at 4.0%.

"If they don't do anything [i.e. cut sharply and soon] this could go beyond just a normal recession," warns Thomas Mayer, Deutsche Bank's European economist.

"This credit crisis could turn into a very uncomfortable situation with a real economy-wide crunch that we cannot stop," Mayer believes, pointing to Thursday's record spike in open-market lending rates between Europe 's banks.

The cost of borrowing one-month funds yesterday shot 0.6% higher to 4.87%. Short-term Euribor rates are used to price floating-rate mortgages in Spain , Italy , Ireland , and other parts of the Eurozone, notes The Telegraph in London today.

Further signs of the mounting stress in global finance come from the Caisse group of funds in Quebec , Canada , where the "commercial paper crisis" may force it to write down C$500 million (US$497m).

"This might seem high, but the large international banks have provisions [to write off] 30-50% of their exposures," Henri-Paul Rousseau, president and CEO, is quoted by Global Pensions magazine.

In London yesterday, ailing mortgage lender Alliance & Leicester accepted a £4 billion cash injection (US$8.24bn) from Credit Suisse. A&L has already taken a pretax loss of £55 million ($113m) on its collateralized- and structured-debt investments, and it will "mark down" a further £101 million ($208m).

And meantime in Asia, sales of corporate and government bonds denominated in Dollars, Yen and Euros sank by 91% this month from Nov. last year, the steepest drop since Feb. 2002 according to Bloomberg data.

"When paper money comes into some sort of disrepute, which it appears to be doing at this point, gold becomes the hard monetary asset," says John Embry, chief investment strategist at Sprott Asset Management in a new interview with The Gold Report .

"Once it breaks free of all its tethers, like moving in direct relation to weakness in the US Dollar [then] I think the Gold Market will probably achieve prices that will shock most people."

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 2007

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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