Gold Bounces as World Stock Markets Slide; "No Bid" for Asset-Backed Derivatives

By: Adrian_Ash

SPOT GOLD PRICES ticked lower during a torrid session for Asian and European stock markets early Thursday, avoiding the worst of the current sell-off in financial assets to record a Morning Fix of $664.15 per ounce in London .

The Nikkei in Tokyo had earlier ended the day 1.99% lighter, while South Korea 's Kospi index dropped nearly 7% by the close. Despite reporting strong earnings growth, Commonwealth Bank of Australia dropped 5%, while Rams Home Loan – the Australian mortgage lender that warned on profits yesterday due to the global credit crunch – lost nearly 60% of its value.

European bourses opened 2% down and then continued to sell off. Losses on London 's FTSE100 – now below 6,000 for the first time since March – reached 3.1% by midday .

Gold priced against Dollars, meantime, bounced off Wednesday's low at $662.89 per ounce before rising towards Thursday's US open. That level, only 0.5% down from a month ago, compares with an 11% loss in both the Japanese Nikkei and the broad European stock markets. The S&P500 index in the United States closed Wednesday night 10% down from mid-July.

"Some of gold's drop [today] is equity-driven and some is Dollar-driven," reckons Simon Weeks at ScotiaMocatta in London . "People in Asia bought gold and they sold last night."

Overnight at the Tocom, gold futures for June 2008 lost 0.8% against the rising Japanese Yen, now at a five-month high on the currency markets.

"Our thinking is people should be buying [gold] on dips," says Weeks. "As we head into the weekend, we're looking for more insurance-related buying."

Priced against Sterling and Euros, gold has so far gained 0.8% this week as the two currencies have been routed below $1.98 and $1.34 respectively. Only the Japanese Yen has risen against the US currency, breaking through ¥114 to the Dollar late morning in London – a 5% move from this time last week that will put many leveraged forex funds under severe pressure.

Yesterday marked the deadline for hedge-fund investors to withdraw what's left of their cash before the third quarter ends in 45 day's time. Thursday's sharp losses in Asia and Europe – plus the 1% loss at the US open anticipated by Dow futures – show that a fire-sale to meet those redemptions in on.

As for the asset-backed credit derivatives that acted as collateral to help fund the recent stock market highs, J.P.Morgan told the Financial Times overnight that there are now "no bids" in the secondary market for much of this paper. Analysts at Dresdner Kleinwort say that 101 different credit-derivative notes now need downgrading by the credit-rating agencies.

The two biggest ratings agencies, Moody's and Standard & Poors, have already put $2.16 billion of such bonds on 'watch', more than 7% of the total sum issued since 2005. But that may be too little, too late for the world's regulatory bodies. Fears of legislation and possible legal action will only add to the market's disdain for mortgage-backed bonds amid the currency turmoil.

The European Commission said today it will investigate the ratings given to bonds backed by subprime US home loans. "The securitised subprime mortgage market would not have grown to the extent that it did without the favourable ratings given by some agencies," one official in Brussels said. Barney Frank, Democrat chairman of the US House financial services committee, thinks the agencies have "not done a good job" and says he will also investigate.

"Gold has been an oasis of calm compared to the deep losses seen across other asset markets over the past month," as John Reade at UBS in London said in a client note Wednesday.

The longer this credit crunch undermines confidence and valuations in all other financial markets, he believes, the more likely is becomes that gold will attract serious "safe-haven" buying by anxious investors tired of losing money.

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 2007

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