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Gold Falters as Rumours Grow of a Major Bank Failure

Commodities / Gold & Silver Feb 12, 2008 - 07:32 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF PHYSICAL GOLD BULLION continued to tick lower from yesterday's six-session high early Tuesday, slipping $5 from last night's New York close as rumors grew of a major banking loss in Europe and the US government prepared a new bail-out for struggling mortgage debtors.

By the AM Fix in London , set at $920.25 per ounce, European stocks had pushed 0.6% higher despite a 5.3% drop in ING, the Netherlands ' largest bank, now said to be facing a severe loss on its US subprime investments.


The US Treasury Dept., meantime, is expected to announce "Project Lifeline" later today, a new initiative offering all home-buyers at risk of foreclosure an extra 30 days to renegotiate lower-cost loans.

The plan extends the " Hope Now " scheme launched in Dec. '07 that has now helped 545,000 subprime borrowers. Only one-in-four of those home-buyers has actually arranged cheaper finance, however.

The rest have simply agreed new repayment plans, often with longer terms according to the New York Times .

"There is this huge disconnect between what is being represented by the industry and what is being experienced on the ground," says Kevin Stein of the California Reinvestment Coalition in San Francisco .

"Borrowers are falling through the cracks while more and more of these press releases come out. It's clearly not enough."

Asian stock markets were mixed on Tuesday, gaining 1.3% in Hong Kong but losing 1.6% in Taiwan after a week's holiday for the Lunar New Year.

The Shanghai & Shenzen stock markets re-open on Wednesday.

Sydney 's stock market rose 1.2% even as 10-year Australian bonds rose on news that the country's business confidence has sunk to its lowest level since Sept. 2001. In Tokyo the Nikkei ended the day flat after gaining 0.9% early on.

Gold Market futures traded for Dec. '08 delivery at the Tocom rose 0.8% against the Yen to equal $930.49 per ounce.

"I don't think players have fully returned in the [Asian] region," said Peter Tse, a gold dealer at Scotia Mocatta in Hong Kong , to Reuters overnight.

"Probably we have to wait until market participants have returned from their [Chinese New Year] holidays. I would say today [the Gold Price] is in a $919 to $930 range, but the medium-term range is still looking good."

Copper prices rose for the fifth session running meanwhile, as crude oil slipped back from Monday's 2% gains after Valero, the giant US refinery group, re-opened its Delaware City plant following a power failure.

Wheat rose, corn slipped, and government bond prices ticked lower in Europe on news that UK consumer-price inflation rose last month to a six-month high of 3.2% year-on-year.

Released as the British Retail Consortium confirmed aggressive High Street discounting post-Christmas, the UK inflation data showed clothing & footwear prices falling almost 5% year-on-year. Audio-visual items dropped 17% in price from Jan. '07, and the average cost of a new computer fell by more than one quarter.

But the basic cost of living accelerated sharply, with milk, cheese, eggs and meat all rising more than 15% in price from Jan. '07, while breads & cereals gained almost 8%.

The cost using public transport rose by 6%, as did health insurance premiums. ( Can Inflation Kill Recession? Read more here... )

This sharp rise in UK inflation failed to stop the British Pound dropping a whole cent this morning to $1.9445, however, because the City of London had expected Jan.'s inflation figure to be stronger still.

On its trade-weighted index, the Pound has now lost 8% of its value from this time last year. The Gold Price in Sterling has risen almost 46% since the global banking crisis began in July, hitting new record highs above £476 per ounce already this week.

The European single currency today held steady around $1.4500, capping the Gold Price in Euros below €635 per ounce. The Japanese Yen stuck to the middle of its one-month range between ¥107.50 and ¥106.00 per Dollar.

Impacting the gold-mining sector, meanwhile, Creamer's Engineering News says today that Eskom – the state-owned South African utility which closed the nation's entire mining industry with a series of power outages in late January – is being squeezed by strong global demand for even low-grade coal.

Speaking at an 'Energy Crisis Coping Forum' in Midrand yesterday, Dr. Steve Lennon – managing director of Eskom's corporate services dept. – said that "supply was now generally at the bottom end of a spectrum that measures energy content, material abrasiveness, and acceptable levels of fine material, leading to higher-than-anticipated load losses," Engineering News reports.

The world's second-largest gold producer after China – itself suffering sharply lower gold-mining output – South Africa 's gold mining industry is now running on 90% energy supplies. And adding further to input price inflation globally, researchers at Hallgarten & Company now warn that Chile , the world's largest copper producer, also faces sharply higher electricity costs and even an all-out energy outage thanks to a lack of hydro-generation and lower natural gas imports from Argentina .

"The only thing that remains to be seen is not whether the country goes through an energy crisis, but how deep that crisis will be," warn the Latin American investment specialists.

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 2008

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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