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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Sinks Like a Stone to $906 On Heavy Investment Fund Liquidation

Commodities / Gold & Silver Mar 20, 2008 - 10:53 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD sank as European markets opened for business on Thursday, giving back a 2% rally in Asia to plummet towards a new one-month low, just shy of $906 per ounce.

Bouncing more than 12% beneath Monday's all-time record high of $1,034, the Gold Market then rallied to record an AM Fix in London of $913.50 per ounce – its lowest level since Feb. 18th.


Soft commodity and base metal prices also extended their losses, while crude oil slipped below $102 per barrel in after-hours US trade last night – down almost 8% from last week's all-time record high.

Asian stock markets were mixed; London and French equities fell; the German Dax held near break-even by lunchtime in Frankfurt .
 
"We have to see whether the [big investment] funds will continue selling," said Ronald Leung, head of Lee Cheong Gold Dealers in Hong Kong , to Reuters this morning.

"If they do, of course there is a possibility that Gold will go down and test $900."

Leung blames this week's 11% plunge on Tuesday's smaller-than-expected cut to US interest rates from the Federal Reserve, plus the "absence" of Japanese speculators willing to Buy Gold at lower levels.

Next week marks the end of the Japanese tax-year, a cautious period for Tokyo investment funds when they're more likely to close out gains than extend or establish new positions.

It's also signal that Wednesday's sharp fall coincided with the start of US dealing. Bullish gold futures traders – waking up to Comex margin calls after the initial 3% drop following the Federal Reserve's apparently "small" cut to interest rates of Tuesday afternoon – may well have been forced to liquidate their leveraged gold positions to cover losses elsewhere.

"It is likely that bargain buying could lift Gold Prices as there is still some upside risk to global financial markets," notes today's Precious Metals Daily from Walter de Wet at Standard Bank in Johannesburg .

That risk is "reflected by [wide] credit spreads" between corporate & financial vs. government bond yields. But given the "heavy fund liquidation...we envisage near-term weakness going forward" in precious metals, de Wet concludes.

Back in Hong Kong today, the stock market lost 3.6% by lunchtime, led down by an 8.4% loss in PetroChina – the world's largest energy stock by market-cap – which announced below-forecast earnings.

Zijin Mining Group, China 's biggest gold producer, lost one-fifth of its value. In Sydney , Australia , Newcrest Mining – Asia 's No.1 gold stock – lost 11% by the close.

Financial and export stocks listed in Tokyo, however, pushed the Nikkei index 2.5% higher as the US Dollar regained half-a-Yen to ¥99.65.

The European single currency fell to a one-week low of $1.5450, stemming the plunge in Gold Prices in Euros at €585.50 per ounce.

For British investors looking to Buy Gold today, the price bounced 10.5% below Monday's new record peak at £458 per ounce.

Today in London the Bank of England receive a formal request from the UK's biggest banks to offer extended "liquidity" loans to the London market in return for a wider range of higher-risk collateral.

"The Bank of England is keen to ensure we've for good, strong confidence in our banks," said Angela Knight of the British Bankers Association to the BBC this morning.

"After all, we've got good, strong banks."

At present, these "good, strong" banks will not lend freely to each other. The last auction of short-term money from the Bank of England was over-subscribed more than five times over.

The Bank of England today added an extra £5 billion to its regular weekly auction of short-term funds to commercial banks, taking the total cash on offer to £11bn ($21.8bn).

Apparent "scare-mongering" blamed on unscrupulous short-sellers created an 18% drop in HBOS – the UK 's very biggest mortgage lender – on Wednesday. The Bank of England took the unprecedented step of telephoning London news agencies directly to say that it was not supporting any UK banks.

Many banking staff across the Square Mile have been asked to work tomorrow's Good Friday holiday.

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.

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