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Precious Metals Strong on Protectionism and Worsening Banking Crisis

Commodities / Gold & Silver 2009 Feb 12, 2009 - 06:02 AM GMT

By: Adrian_Ash


THE PRICE OF GOLD held steady ahead of the US opening on Thursday, recording the best London Gold Fix in 7 months at $944 an ounce.

World stock markets tumbled despite US lawmakers nearing final approval of their $789 billion stimulus bill.

Eurozone, Indian, British, Canadian, Australian and Swiss investors all saw the Gold Price reach new all-time highs.

"Relentless buying...renewed fund buying interest...investment pouring into gold," is how three major gold dealers describe Wednesday's 3.1% jump in Spot Gold prices – the sharpest gain so far this year.

Crude oil meantime slipped below $36 per barrel early Thursday, while government bond prices rose, pushing 10-year US Treasury yields down to 2.75%.

New data showed European industrial production sinking by one-eighth in Dec. compared with a year earlier.

Japanese wholesale prices fell for the first time in 5 years last month, slipping by 0.2% and marking the return of deflation.

Credit Suisse, the Swiss banking group, reported a record quarterly loss of CHF 6 billion ($5.2bn), while insurance giant Swiss Re lost its CEO, Jacques Aigrain.

Shareholders in Belgium's ailing Fortis Bank rejected a $20bn takeover by BNP Paribas.

"[It was] the SPDR gold ETF that drove the spot market through resistance at $930 yesterday to paint a very bullish picture," according to a technical note from Mitsui.

Wednesday was "the third largest daily addition to this fund since its inception at 1.3 million ounces," the gold dealer adds.

"Approximately $4.5 billion has flowed into this fund since the start of the year – safe haven buying in force!"

All told, the Gold ETF funds sponsored by marketing-group the World Gold Council (WGC) yesterday added 45.5 tonnes of gold – swelling by 4.3% – to reach a new record hoard of 1,107 tonnes.

The gold is held in trust, mostly at London's HSBC bank, with investors – led by institutional buyers – then holding shares in the trust.

Faced with a one-third collapse in the value of Russian Rubles, high-net worth individuals in Russia are also pouring money into gold, reports Reuters, demanding physical Gold Bullion – whether as bars or coins – as well as "gold accounts" at the government-owned Sberbank, Russia's largest lender.

"Russians opened 170,000 new accounts which track the price of precious metals last year," according to Sberbank's head of forex operations, buying the equivalent of 55 tonnes of metal and "taking the total number of such deposits to around 300,000."

Over in India, however – home to the world's hungriest gold jewelry market –
"Gold buyers are not forthcoming," says Daman Prakash, head of the MNC Bullion wholesalers in Chennai.

"I can only sit and wait for my customers, even though we are in the midst of a wedding season. Gold demand is not even trickling in. I am stuck with my gold and silver stocks since mid-December."

Gold has risen in value for India owners in 26 of the last 38 years. Today the Gold Price in Rupees leapt to new all-time highs above R14,500 per 10 grams, while the New Delhi government approved a capital injection of 38 billion Rupees ($778m) into three major banks, staged over two years.

Staged over two years, the cash should "increase their capital adequacy ratio" according to home affairs minister P. Chidambaram.

Across in Dublin, the Irish government announced a fresh €7 billion ($9bn) cash injection for Allied Irish and the Bank of Ireland, collecting warrants worth 25% of each lender in return.

"In terms of capital, I believe we got it right," claims Ireland's finance minister Brian Lenihan.

"No government in the world has been able to devise a totally satisfactory scheme of risk assessment. We will continue to work on that."

Here in London, City watchdog the Financial Services Authority (FSA) joined the row over risk management at now-failed mortgage lender HBOS by claiming it was concerned by the bank's behavior both before and after it sacked global risk manager, Paul Moore, in 2004.

Moore claims he took a "substantial" pay-off after the group's CEO, Sir James Crosby, sacked him for warning that "the bank was moving too fast."

Sir James yesterday quit his new role as a non-exec' director of the FSA, claiming there was "no substance to [Moore's] allegations."

On the political front – and ahead of this weekend's emergency G7 meeting of leaders from the West's largest economies – German finance minister Peer Steinbrück accused France of "indirect protectionism" after it offered a €6 billion loan ($7.8bn) to auto-makers Renault and PSA Peugeot-Citroen, provided they don't close any French factories.

"The priority is to keep industry in France. Have no doubt about that," said French finance minister Christine Lagarde today.

New US president Barack Obama's "Buy American" campaign will also be at issue when the G7 meets in Rome according to a Canadian delegate.

Looking ahead to Central Bank Gold in 2009 , rubber-stamping sales of 403 tonnes will be just "a formality" according to a spokeswoman from the International Monetary Fund (IMF).

Speaking to Reuters, "There are no plans to change the proposal," she said. "The package of IMF governance reforms, including gold sales, was submitted to the US Congress last November, but will need to be reintroduced as a formality.

"The timeline will depend on the Congress' schedule."

During the IMF Gold Sales of 1976 to 1980 – when the central banks' banker sold 1,600 tonnes of gold – the Spot Gold price in US Dollars rose 8-fold regardless.

By Adrian Ash

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 , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

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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