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Gold Rallies as Bond Yields Go to Zero

Commodities / Gold & Silver Dec 10, 2008 - 08:17 AM GMT

By: Adrian_Ash

Commodities
THE PRICE OF GOLD
rose steadily throughout early London trade Wednesday, reaching a one-week high above $792 per ounce as strong gains in Asian equities faded on Europe's bourses.

As the Wall Street opening drew near, the FTSE100 index stood just 0.3% higher, while the Gold Price in Sterling reached £534 an ounce, almost 3% above Tuesday's low.


The Gold Price in Euros broke up to €612 an ounce, its best level so far this week, while the single currency slipped back from a 10-session high vs. the Dollar above $1.3000.

"Banks and brokers globally are now well capitalized," says Walter de Wet in his Gold note for Standard Bank in Johannesburg today, "with total capital raised exceeding total write-downs by $41 billion.

"[But] we doubt that credit fears have subsided for good."

Here in London, today's Telegraph newspaper reports that UK banks – now part-nationalized by the socialist Labour government – will need fresh tax-payer funds if they are to deliver both greater lending to households and business as well as the improved "core capital" ratios demanded by City watchdog the Financial Services Authority (FSA).

The Financial Times says UK chancellor Alistair Darling may extend tax-funded guarantees to business loans and credit in a bid to revive corporate lending.

"Banks are being asked to lend significantly more without fully pricing in the risks," says Simon Ward, economist at the ailing New Star investment group.

"That puts their capital positions in jeopardy and may mean they need a further capital injection in a year or two."

Across the Atlantic in Washington, a Congressional vote is now widely expected on a $15 billion rescue of the "Big Three" US car makers.

Global auto sales are predicted to end 2009 more than 8% below last year's levels according to new research from the Global Insight consultancy.

A report in the Wall Street Journal says insurance giant American International Group (AIG) owes $10 billion on failed trades that are not covered by the US government's $150bn bail-out.

World mining megalith Rio Tinto said today it will slash jobs by more than one-in-eight as demand for base metals collapses. November saw China record its first year-on-year drop in exports – down 17% from the same month in 2007 – for the first time since 2001, new figures show.

Yesterday the yield paid to buyers of 3-month US Treasury bonds turned negative as the price of these so-called "safe havens" surged yet again, offering a 68-year low of minus 0.01%.

"The futures market is pricing in a 98% probability of 75 basis-points cut by the Fed next Tuesday to 0.25%," continues De Wet at Standard Bank. "We believe other central banks will follow."

But while Negative Real Interest Rates Drive Investors to Gold , low crude oil prices – holding below $44 per barrel on Wednesday – offer "little support.

"In fact," says De Wet, "crude oil might test yet lower levels towards year-end."

Gold Futures traded in Tokyo meantime rose 1.8% today, even as the Japanese Yen reversed an early dip on the currency market.

The Nikkei stock index added 3.5%, reaching its best close in three week, despite news of a shocking fall in machinery orders (down 4.4% in Oct. from Sept.) and a sharp decline in corporate goods prices (down 1.4% month-on-month).

"The precious metals are creeping higher," says the precious metals team at Mitsui in London, "but from a technical perspective we are in the middle of a consolidation phase.

"Gold is range-bound between $740-830."

On the other side of the trade, meantime, shares in Canadian Gold Mining firm Gabriel Resources fell to an all-time low on Tuesday – down by four-fifths since Jan. '07 – after a Romanian court cancelled a key license at its much-delayed Rosia Montana project.

Scarred by streams of toxic run-off since it was first mined in Roman times, the "Red Mountain" – Europe's largest gold deposit – is estimated to hold 14.6 million ounces of gold.

The high-profile blocking campaign – part-funded by Hungarian hedge-fund legend George Soros and fronted by English actress Vanessa Redgrave – yesterday won the annulment of an "archeological discharge certificate", without which Gabriel cannot disturb the historic site.

The court's decision "is final, is not appealable" said the judge.

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.

Adrian Ash Archive

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