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Gold Plunges 3.4% on Dollar Rallies, Rising Banking Stocks on Bad News

Commodities / Gold & Silver Apr 18, 2008 - 10:19 AM GMT

By: Adrian_Ash

Commodities Gold Plunges 3.4% on Dollar Rallies, Rising Banking Stocks on Bad News
SPOT GOLD PRICES dumped 3.4% to $912 per ounce in the first-half of London trade on Friday, falling to a five-session low of $916 per ounce as both commodity and bond prices fell, but European stock markets rose.

Crude oil dipped one dollar from yesterday's new record high above $115.50 per barrel as the US currency rallied from new record lows in the forex market.


The Euro dropped two cents from Thursday's high of $1.5964, while soft commodity prices dropped around 1% on average.

Rice jumped yesterday above $1,000 per tonne for the first time ever on news the world's largest rice importer, the Philippines, failed for the fourth week running to buy as much rice as its government bid for.

Bangladesh failed to secure any rice imports this week, says the Financial Times .

"Gold has [had] a little bit of help from the Dollar," says Jeremy East, head of the commodities desk at Standard Chartered in London , "as the currency looks like it's heading towards $1.60 vs. the Euro.

"One can also argue for [ Gold as] an inflation hedge," he believes. ( Really? Get The Facts About Gold in this Free Gold Report ... )

Today the Euro pulled back 1.6% from Thursday's new record high of $1.5962.

It also dropped 2.1% against the previously weak British Pound, falling to a two-week low despite a surge in Germany's producer price index for March – news that would support the ECB's decision not to cut interest rates.

"We continue to expect Gold Prices to trade inversely with the US Dollar given gold's currency-like properties of being a store of value and a medium of exchange," says Jeffrey Currie, an analyst at Goldman Sachs.

He raised the bank's Gold Price forecast from $850 to $920 and above for the next six months.

Spot Gold has averaged $924 per ounce so far this year.

Alongside the drop in Gold Market prices today, government bonds – the "safe haven" of choice for institutional investors since the banking crisis began last summer – headed for their biggest fall in more than four years according to Bloomberg data.

German bund prices fell almost 1% this morning after Nout Wellink, a member of the European Central Bank's governing council, said he saw "no dampening of inflation" ahead.

Followed Wednesday's news that Eurozone consumer prices rose 3.5% in the year to March – plus Eurogroup chairman Jean-Claude Juncker saying on Thursday that volatility and strength in the EUR/USD exchange are "undesirable" – Wellink's comment dented what few hopes remained for lower ECB interest rates anytime soon.

Bond traders pushed the yield on two-year bunds up to 3.73%, some 33 basis points higher for the week. Japanese bond prices closed lower in Tokyo for the third week running after new Bank of Japan chief Masaaki Shirakawa also dashed hopes for a rate-cut, repeating his view that "moderate growth" will soon return but consumer prices will also keep rising.

The Bank of Japan has held its target interest rate at 0.5% since March 2007. It's been held below 1.0% since 1995 as Japan has struggled to climb out of the depression caused by its late '80s real estate and financial boom.

By the Wall Street open today, 10-year US Treasury yields stood 27-basis points higher from Monday's start, trading up to a six-week high of 3.77%.

The 10-year yield hit a five-year low of 3.34% this time last month.

Here in London , the British government today reported a record public-sector borrowing figure for March of £10.2 billion ($20.2bn).

The UK Treasury is now looking to issue up to £50 billion ($99.5bn) in new government gilts, the Financial Times reports, so the Bank of England can lend them to private banks unable to raise funds in the open market.

The banks will be able to park their hard-to-sell mortgage and credit-card bonds at the Bank of England, using the government bonds lent in return as collateral for cash loans elsewhere.

Shares in the FTSE banking sector – down by more than one-fifth from April 2007 – rose today on rumors of a £10 billion ($19.9bn) rights issue from the UK's second-largest bank, the Royal Bank of Scotland. Its shares rose 2.5% today.

Citigroup reported a $5.1 billion loss for the first quarter in New York this morning. Its stock rose 4% in pre-market trade.

Overnight, the NY attorney-general subpoenaed 18 Wall Street banks and securities dealers in his investigation into the "auction-rate" market – a move suggesting that "somebody has made up their mind there really were abuses" in the way these high-yield securities were marketed and sold to retail investors, says one former US regulator.

The $330 billion auction-rate market – in which US municipalities, student-loan companies and money-market-style funds raise capital – effectively shut down in February, "leaving some issuers paying rates as high as 20% and investors frozen in the debt," according to Bloomberg.

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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