Gold Surges in European Trading to $835

By: Gold_Investments

Gold
Gold surged $26.90 to $824.60 per ounce in New York on Friday and silver was up 35 cents to $14.74 per ounce. Gold's safe haven qualities were again in evidence and gold was up nearly 5% for the week. Gold has since moved upwards in Asia and European trading and is at $835.50 per ounce at 1200 GMT. Gold also surged in euro, British pounds and other currencies and is trading near new record all time highs in pounds and euro at £403 GBP (up from £387 on Thursday) and €561 EUR (up from €541 on Thursday).

Gold is strongly supported by risk aversion which continues to build with the gradual realisation that the U.S. may be on the verge of a serious recession. The credit crunch is clearly beginning to impact on economic growth both in the EU and even more so in the U.S. With the dollar likely to remain weak and oil still near record highs it is difficult to see a catalyst for any significant sell off in gold.

The Financial Times reports that investors fear the financial system is moving into new credit turmoil, which could create further losses for financial institutions – and potentially hurt sentiment in the “real” economy.

Credit markets are trading at levels which imply that investors assume that the U.S. is heading for a recession, bank analysts and economists have warned. “Recession is getting priced in,” said Jan Loeys, economist at JPMorgan, adding that markets went into “virtual panic mode” last week. “Pressure is building for central banks to become a lot more active and vocal [this] week if they want to avert a collapse in credit markets.”

Swaps spreads rose sharply in UK gilts and U.S. Treasuries, amid a flight to quality and fear of bank defaults. Spreads on high-yield corporate bonds and the yen-dollar exchange rate also leapt dramatically, while liquidity evaporated in many corners of the credit markets.

Peter Sutherland, chairman of both Goldman Sachs International and BP, joined those voicing concern. “The U.S. economy is in a mess,” he told TV3, an Irish TV channel, on Sunday. “There is a whole big issue...which has not fully played out in regard to providing credit and liquidity to institutions, so I think it is a dangerous period for the world. I think we are going to go through next year, certainly the first half of next year, with considerable traumas.”

One factor undermining investor confidence is that the projected size of this year's credit shock is now rising rapidly. The U.S. government initially forecast $50bn losses on subprime securities. However, investment banks now expect $200bn-$500bn subprime losses – and additional massive losses in other debt markets, such as credit card loans.

Lawrence Summers, former U.S. Treasury secretary, writing in Monday's Financial Times, says: “The odds now favour a U.S. recession that slows growth significantly on a global basis.”

European financial institutions are diversifying into alternative assets and institutional investors plan to pump more than €100 Billion into alternative assets such as private equity, infrastructure and commodities in the next two to four years.

Gold's safe haven qualities will reassert themselves in the coming months and lead to gold surpassing it's 1980 high of $875 and challenging $1,000 per ounce in 2008.

Forex and Gold
The dollar index fell a further 1% to 75.05 last week. The dollar was down against the Norwegian krone which increased 1.7%, the Japanese yen 1.4%, the Swiss franc 1.2%, the euro 1.2%, the Danish krone 1.1%, and the Swedish krona 1.0%. The dollar was stronger against the Iceland krona which declined 2.5%, the Brazilian real by 2.2%, the Chilean peso by 1.1% and the South Korean won by 1.0%.

The dollar's status as the reserve currency of the world is coming increasingly into question. Liam Halligan, the perceptive Economics Editor of the Sunday Telegraph wrote an article entitled 'Bet your bottom dollar tensions will follow':

"The weak dollar used to be an economic issue. But the greenback has now dropped so far, and has so much further to fall, that its decline is of profound political importance. The dollar isn't any old currency. And it isn't just the currency of the biggest economy on earth. The dollar is the world's "reserve currency" - which means central banks everywhere use it to stockpile wealth. No less than two-thirds of all sovereign foreign exchange holdings are denominated in dollars.
. . .

This sounds technical, but it isn't. During the 19th century, sterling was the world's reserve currency - when the UK bestrode the world. The dollar muscled in a century or so ago, confirming the start of the U.S. hegemony.

Reserve currency status brings America huge power. It puts the dollar constantly in demand, meaning the U.S. can secure cheaper debts and run bigger deficits at everyone else's expense. It means weaker nations "peg" to the dollar, greatly extending America's sphere of influence.

Incredibly, this long-standing system is now unravelling. Rather than keeping their reserves in falling dollars, the new economic titans are stuffing them into "sovereign wealth funds" - which they're using to buy-up debt-distressed Western firms, African oil fields and any other canny investment they can find. These upstart countries no longer want just stability and value preservation. They're looking for, and achieving, asset accumulation - and all the power that brings.

The importance of "dollar divestment" cannot be overstated. At the very least it means the greenback has much further to fall - plunging the U.S. into recession. But it begs a bigger, more alarming, question. How will Washington react to the end of the U.S. hegemony?"

Silver
Silver is trading at $14.90/92 at 1200 GMT.

PGMs
Platinum was trading at $1484/1489 (1200 GMT). Platinum has remained well supported and shown strength due to the large supply/demand imbalance.
Spot palladium was trading at $360/365 an ounce (1200 GMT).

Oil
Oil prices have continued to creep towards the $100 per barrel level. Oil prices rose to near $99 a barrel Monday with temperatures falling in the United States and Europe and continued weakness for the U.S. dollar. Light, sweet crude for January delivery added 75 cents to $98.93 a barrel in electronic trading on the New York Mercantile Exchange, midday in Europe. On Friday, the contract rose 89 cents to settle at $98.18 a barrel, besting the previous settlement record by 15 cents. January Brent crude added 68 cents to $96.44 a barrel on the ICE Futures exchange.

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