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Gold Surges as Banking Stocks Slide on Credit Market Disaster

Commodities / Gold & Silver Feb 19, 2008 - 08:46 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD jumped 1.9% early Tuesday to hit a one-week high of $918.90 per ounce as European equities reversed early losses after a sharp fall in banking stocks.

Credit Suisse, the second largest banking group in Switzerland , sank nearly 10% at the Zurich opening after it trebled the size of write-downs on its debt investments.

Only last week banking analysts had agreed that Credit Suisse "weathered 2007 comparatively well" after it wrote down $1.4 billion for Oct. to Dec.

"This is a disaster, this could be the tip of the iceberg," says Peter Thorne, an analyst at institutional brokerage Helvea.

"According to the presentation Credit Suisse gave a week ago their exposures to residential mortgages were $7.9 billion and collateralized debt obligations were $2.4bn, and now they have just written down $2.85bn down."

Here in London – where Northern Rock has finally been nationalized after receiving more than $50 billion in tax-funded support – shares in Barclays lost 4.5% at one point today after the UK's third largest bank cut second-half profits by one fifth.

Again it blamed credit investment write-downs, as well as lost earnings from securitization. All told, the world's biggest financial institutions have now written down $145 billion since the US subprime collapse began in July 2007, according to Reuters data.

The Gold Price , in contrast, has risen by one-third or more since then against all major currencies.

"Additional buying [from Newcrest Mining] has certainly been a supporting factor for gold over the past few months," says today's Gold Market note from Mitsui, the precious metals dealer, "but it has not been the only story and with the current consolidation continuing, the market looks set to test higher again soon."

Australian gold miner Newcrest today reported a net loss of A$8.1 million (US$7.4m), driven by the cost of buying back 3.4 million ounces of gold – previously sold forward during the two-decade bear market in gold ending 2001 – over the last six months.

"As of the 15th February," Mitsui adds, "Newcrest still holds 622,302 ozs on its hedge book."

Elsewhere in the precious metals market today, platinum futures jumped "limit up" in Tokyo today and rose to a new record high of $2,145 per ounce in London as South Africa 's energy shortage continued to drive speculators into the white metal.

"The platinum market was already worried about supplies in South Africa and this power problem emerged to trigger more buying," says Hisaaki Tasaka, a precious metals analyst at Ace Koeki in Tokyo , Japan .

"But at the moment, we are not seeing an actual shortage in supplies," he notes, "because lease rates have not surged."

New mining supply outweighed physical platinum demand by 1,715 tonnes last year, according to Johnson Matthey, the world's No.1 platinum distributor. Enough to meet 26% of annual consumption, last year's excess supply in the platinum market was four times the surplus of 2002.

Meantime on the currency markets this morning, the European single currency jumped almost one cent vs. the Dollar – capping the Gold Price in Euros below €623.50 per ounce – despite news that construction output in the 14-nation Eurozone shrank for the second month running in December.

Eurostat, the official data agency, also revised Nov.'s output further down, taking the total contraction so far to 1.6%. Inflation in the cost of living, on the other hand, surged to a 14-year high of 3.2% at the end of 2007, squeezing the European Central Bank's room for maneuver.

Copper futures today rose 1% in Shanghai on news that global stockpiles have shrunk to a five-month low.

Ahead of Wall Street's return after the long Presidents Day weekend, US crude oil futures rose for the second session running to hit a five-week high above $96.40 per barrel in London – more than 1% higher from Friday's close in New York.

"It's likely that Opec will make a cut [to output] as in their view the market is well supplied," said one Swiss analyst to Bloomberg earlier.

The Opec oil cartel – which pumps 40% of the world's daily supply – has cut its demand forecasts for April to June by 1.6 million barrels per day. Yesterday the Iranian oil minister said that "cutting production has been the normal process every year in March."

Prices of bauxite, the aluminum ore, continued to rise, taking the gain since the start of January above 30% – double the gains of 2007 as a whole – after Indonesia , which supplies more than two-thirds of China 's bauxite demand, cracked down on illegal mining, restricting output.

Robusta coffee today gained 1.2% in London , taking its rise since New Year's Day to 22%, a "record start" according to Bloomberg data.

By Adrian Ash

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 , 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.

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