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Gold Selloff Continues as Hedge Funds Deleverage

Commodities / Gold & Silver Sep 11, 2008 - 08:14 AM GMT

By: Mark_OByrne

Commodities Gold's sell off continued yesterday and gold has fallen to new 11 month lows. Gold recovered slightly in Asian trading before a further sell off in early European trading. Gold remains under serious pressure as the dollar's rally has continued with the dollar reaching a 1 year high against the euro of $1.3890. Meanwhile, oil has fallen again and NYMEX sweet crude is now near the psychological $100 level.


It is important to remember that gold's fall in recent months is primarily a fall in terms of the recently strengthening US dollar. Gold has remained quite firm in euros and sterling as seen in the charts below. Indeed since the start of the credit crisis gold remains up some 10% in euro terms and by nearly 26% in sterling terms.



The sharp selloff in gold continues and there is increasing informed speculation that leveraged hedge funds are dumping positions in equity and commodity markets after incurring significant losses in recent weeks.

Fears of a meltdown in the credit default swap (CDS) market and in the financial system remain elevated. As the markets digest the implications of the government's nationalisation of Fannie and Freddie and possible bankruptcy of Lehman Brothers, the market for trillions of dollars of credit default swaps is facing a possible meltdown. As we have warned for many months, the losses in credit derivative contracts will result in billions and possibly trillions of dollars of losses for insurance companies and banks.

At the same time hedge funds are facing funding issues from investment banks. Morgan Stanley and Goldman Sachs will only extend new credit to hedge funds and let them place new leveraged bets if Goldman's own corporate bonds are rising in value. According to the FT, if Goldman's bonds rise, allowing it to issue new debt at favorable rates, then it extends fresh credit to its hedge-fund clients. But should Goldman's bonds fall, capping its own flow of finance from the capital markets, then the highly-geared hedge funds must meet margin calls or fold. The message is that "if our firm is in trouble, we would rather fund ourselves than fund you (hedge funds)," the paper quoted a Morgan Stanley brokerage executive with knowledge of the arrangements as saying.

The short term trend in gold remains down but as the carnage in the financial system deepens, gold's safe haven qualities will again come to the fore. While gold has fallen in recent weeks it is important to remember that it has fallen by far less than equity markets and property markets and has vastly outperformed those markets over the medium to long term.



Today's Data and Influence

Ahead today, US Trade Balance figures and Initial Jobless Claims are both due for release at 13:30 GMT.

Gold and Silver
Gold is trading at $742.00/742.70 per ounce (1115 GMT).
Silver is trading at $10.68/10.74 per ounce (1115 GMT).

PGMs

Platinum is trading at $1144/1154 per ounce (1115 GMT).
Palladium is trading at $218/222 per ounce (1115 GMT).

By Mark O'Byrne, Executive Director

Gold Investments
63 Fitzwilliam Square
Dublin 2
Ireland
Ph +353 1 6325010
Fax  +353 1 6619664
Email info@gold.ie
Web www.gold.ie
Gold and Silver Investments Limited
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London,
EC3V 3ND
United Kingdom
Ph +44 (0) 207 0604653
Fax +44 (0) 207 8770708
Email info@www.goldassets.co.uk
Web www.goldassets.co.uk

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at www.financialregulator.ie or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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