Gold Spikes for British Investors as Run On Northern Rock Bank

By: Adrian_Ash

SPOT GOLD PRICES slipped against the US Dollar early Friday, bouncing off Thursday's low at $704.50 but testing the week's highs for British investors as long queues formed outside branches of Northern Rock, the UK 's fifth largest mortgage lender.

Despite having just 0.24% of its assets exposed to the subprime US housing market, Northern Rock's stock plunged by one quarter at the London Stock Exchange in early trade after it said the Bank of England is stepping in to support it with a short-term loan as "lender of last resort."

Northern Rock now accounts for one-in-every-five UK mortgages. The Pound sank on the currency market to a 13-month low versus the Euro. The Sterling Price of Gold broke through £351 per ounce for the third time this week, taking the metal's gains for 2007 to date above 13%.

Earlier in Tokyo , Japanese gold futures ended the day flat as the Spot Price of Gold was unchanged against the Yen. From the Tokyo close of last Friday, however, Japanese investors saw the price gain 1.5%.

"The gold market was under pressure as the Dollar rebounded against the Euro," reckons Hiroyuki Kikukawa, senior researcher at Nihon Unicom in Tokyo .

"The market will see a support level around $700 an ounce following strong oil prices."

As the Dollar gained against the Euro, gold and Pound Sterling, it continued to trade near a 15-year low on its trade-weighted index, and the greenback also hit a three-decade low versus the Canadian Dollar.

Business with Canada accounted for more than 18% of total US trade in 2006. The price of gold in Canadian Dollars has now slipped to a 5-session low of C$728 per ounce. The Euro Price of Gold this morning dipped below €508 per ounce for the first time in a week.

In the commodity markets, crude oil slipped further below $80 per barrel overnight as Hurricane Humberto eased its windspeeds on the Texas/Louisiana coast. Wheat futures lost 2% – their third session of losses – amid what one Tokyo trader called "a technical correction" following Tuesday's fresh all-time highs.

On the data front this morning, Germany – the world's third largest economy – reported no change in its rate of Consumer Price Inflation, holding at 1.9% annually in Aug., supporting the European Central Bank's decision not to raise its interest rates last week.

The broader Eurozone's CPI for Aug. also came in as forecast at 1.7%, while US retail sales data for last month is expected to show an increase – despite rising loan rates for US consumers – at 12:30 GMT .

Ahead of those US retail numbers, US Treasury bonds – the "safe haven" of choice for large institutions since the turmoil in world credit markets began in late July – looked set to record their first weekly loss in a month. Early in Frankfurt today, the yield on 10-year US bonds stood eight points above last Friday's close at 4.46%.

"I'm recommending shorting bonds," says the chief economist at Daiwa Securities in Tokyo . "The deterioration in the US economy is only in the housing market, not in consumption."

But the prospect of subprime "containment" took a dent in London on Thursday when Northern Rock – originator of one-in-five UK mortgages – applied to the Bank of England for an emergency loan.

Northern Rock had previously been recommended by the British press as a strong "bargain" play for equity investors wanting to buy banking stocks cheap amid the turmoil of last month. The bank holds no subprime debt on its books, but its aggressive borrowing from the short-term money markets has caused City investors to sell its shares 50% lower as they grew wary of its exposure to the global liquidity crisis.

In the gold mining sector, meantime, shares in Gabriel Resources lost 25% after Casey Research – a leading gold-mining tipsheet – advised selling the stock on news that GBU must delay a key report on the environmental impact of mining at Rosia Montana in Romania , one of the world's largest undeveloped gold deposits with 15.8 million ounces in likely reserves.

GBU has been awaiting final approval from the Romanian government for several years, a move challenged in the courts by an environmental pressure group funded by George Soros, the Hungarian billionaire.

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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