Gold Slides as Dollar Bounces on Bernanke's New "Strong Dollar" Policy
Commodities / Gold & Silver Jun 10, 2008 - 08:20 AM GMTBy: Adrian_Ash
THE PRICE OF PHYSICAL BULLION slid further in Asia and London on Tuesday, losing half of the Gold Market 's bounce from last Thursday's three-week low after Ben Bernanke – chairman of the US Federal Reserve – repeated his claim of wanting to fight inflation.
Base metal and food prices sank, while crude oil dropped another 0.5% to trade more than $5 below Friday's All-Time Record Oil Price .
Global stock markets also fell hard, losing more than 1% in Europe as Chinese shares closed the session 7.7% lower.
Money also poured out of government bonds worldwide, driving open-market interest rates sharply higher.
The only gainer? The US Dollar rose 0.7% vs. the Yen and 0.9% vs. the British Pound. It also pushed the European single currency more than 0.8% lower inside 10 hours, knocking it below $1.5500 in what's become the most volatile week for the US currency since the Bear Stearns rescue – and all-time Gold top at $1,032 per ounce – of mid-March.
"With the Dollar depreciating from $1.5350 on Friday to $1.5840 yesterday," notes Walter de Wet for Standard Bank in Johannesburg this morning, "precious metal prices remain at the mercy of the extreme volatility [now] driven by market expectations of the interest-rate spread between the Fed and ECB target rates.
"The futures market is now pricing in a considerably higher probability of a rate hike by the Fed in August. Chairman Bernanke is due to speak again today, and the Dollar should remain sensitive to his comments."
Late on Monday, Ben Bernanke put the cart before the horse when he told a Fed conference in Boston that "rapidly rising prices for globally traded commodities have been the major source of the relatively high rates of inflation we have experienced in recent years."
Mistaking the Fed's Own Monetary Inflation for its effect on prices, the chairman then stated that the central bank "will strongly resist an erosion of longer-term inflation expectations."
Yet current Fed interest rates are just half the rate of April's consumer price inflation, and "the Fed appears handcuffed in its fight against inflation," notes the latest Gold Market analysis from Mitsui, the precious metals dealer.
"Friday's dismal unemployment data confirmed how entrenched the US economy is in negative economic circumstances."
That said, the latest data on exchange-traded gold positions – showing the week to June 3rd – "illustrate investors' clear preference to exit out of long Gold positions," Mitsui goes on.
Globally, "investors shed 7% of their global gold holdings. But Asian investors opted to stay neutral, and it was [ US ] Comex players who demonstrated a bearish attitude to the yellow metal."
Amongst the exchange-traded gold funds, "it was the turn of the Australian ETF contract to encounter head winds. On 2nd June, this platform fell by 10.1 tonnes...half of the previous exposure and the largest flood of one day liquidation in its five-year history."
Meantime in the financial sector – which led the plunge in Asian stocks overnight – Citigroup reports that the global banking industry could be tapped for $6,000 billion it offered in corporate loans before the credit crunch bit this time last year.
That's twice the potential drain on bank balance-sheets than the amount outstanding five years ago.
Corporations are already buckling under today's higher funding costs, said Moody's Investor Services on Monday. The ratings agency reported that 2% of speculative-grade corporate bonds defaulted last month, up from 1.7% in April and 1.5% this time last year.
So far in 2008, some 31 issuers have defaulted – already equaling the 2007 full-year total. Moody's expects the default rate on higher-yield corporate debt to reach 5% by the end of this year and rise to 6.3% by June '09.
Investors still holding shares in Swiss giant UBS should also prepare for further losses ahead, warns Peter Thorne of the Helvea brokerage in London , following the fresh write-downs, cash raising and $2.8 billion losses admitted by Lehman Bros. yesterday.
Monday's bad news was "clearly indicative of further write-downs for UBS," he believes, "as is the deterioration in AAA-rated securities and the UK mortgage market."
Today the Royal Institution of Chartered Surveyors (RICS) said transaction volumes in UK residential real estate have slumped to their worst level in three decades. A net balance of 93% of surveyors reported lower house prices in May from April.
By Adrian Ash
BullionVault.com
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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
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