Gold and Commodities Follow Stocks Lower on Vicious Cycle of Forced Selling
Commodities / Gold & Silver Mar 10, 2008 - 09:53 AM GMTBy: Adrian_Ash
SPOT GOLD PRICES gave back and then reversed early gains on Monday, losing $9 per ounce by lunchtime in London to trade at $964.50.
Energy and soft commodity prices also slipped – taking WTI crude oil just below $104.50 per barrel – as short-term bond yields fell and Asian stock markets sank once again, led by a near-10% drop in Malaysia after the ruling coalition lost one-third of its seats in the weekend elections.
"I think these early pre-conditions that have been supportive for the Gold Price are likely to remain in place in coming weeks," says David Moore at Commonwealth Bank of Australia in Sydney today, "particularly the anticipation that the Fed will further lower US interest rates."
Asian stock markets outside Japan today lost 2.8% to reach a seven-week low. The Nikkei in Tokyo dropped 2.0% to close at its lowest level since Sept. 2005.
Five years to the day since French, UK and German equities hit rock-bottom and turned higher after the DotCom Crash, Europe 's 300 largest blue-chips lost 0.6% at the opening on Monday.
Enjoying its longest unbroken bull run in history to June 2007, the FTSE Eurofirst 300 index has now dropped almost one quarter of its value since then.
Europe 's largest banks stand to lose 14% of their book value if their structured-credit investments are reviewed at the latest market-clearing price of 70¢ in the dollar, according to new research from Merrill Lynch – the price that UBS was rumored to get with a "firesale" of US mortgage bonds last week.
"In numbers," reports Lipper Hedge World today, "this could imply the need for a further $68 billion of write-downs, including $21 billion at UBS alone."
In Amsterdam this morning Carlyle Capital Corporation said that it remains "in ongoing negotiations" with its lenders and brokers. CCC is asking for a pause in the forced liquidation of its $21 billion portfolio of residential US mortgage bonds.
Here in London , the CEO of Bovis Homes today called on the Bank of England to cut UK interest rates after reporting a near-9% drop in 2007 pre-tax profits.
The home-building stock lost 8.4% at the opening.
"Turmoil in the credit derivatives markets is having an increasingly brutal impact on the wider financial system," says the Financial Times , pointing to "a vicious cycle of forced selling."
"Many investors fear conditions could worsen as hedge funds, banks and other financial institutions come under pressure to cut their losses before conditions deteriorate further."
The latest Comex gold futures report shows hedge funds and other leveraged players – the so-called large speculators – cut the size of their "long" gold positions by 4% in the week to last Tuesday.
But commercial traders, led by refineries and gold-product fabricators, also reduced the size of their overall positions, while continuing to hold one bullish bet for every three bearish contracts to sell.
All told, the open interest in Gold Market futures shrank by 1.7% between 26th Feb. and 4th March, while the S&P index of US equities lost 3.2% of its value.
The total number of Comex gold futures stood almost one-fifth below the record peak of mid-January. Despite this drop in speculative betting, however, the Gold Price rose by more than 9.5%.
"It is ideal to invest in gold," said Reserve Bank of India director Homi Ranina overnight, advising Indian nationals working in the Middle Eastern oil-state of Bahrain . "[It] will continue appreciating in value in the coming years.
"It is [also] ideal to put money in a basket of currencies, preferably UK Sterling and Euro, against which the Indian Rupee is weakening," he told the Gulf Daily News .
"I shall not advise Indians to invest in their country's stock market now."
On the currency markets today, the US Dollar – against which many Middle Eastern oil states peg their currencies – came within spitting distance of hitting a 12-year low vs. the Japanese Yen below ¥102.
The Dollar also touched a new three-month low against the British Pound, but the European single currency failed to hold above $1.54 overnight, helping the Gold Price in Euros bounce higher from €630 per ounce.
For British investors wanting to Buy Gold today, the price dipped to an eight-session low beneath £479 per ounce.
Petrol prices in the United Kingdom are now averaging £1.06 per liter (equal to $8.19 per US gallon), yet the UK government is expected to go ahead with a near 5% increase in petrol duty in tomorrow's 2008 Budget.
In the United States , the surging cost of crude oil has pushed average gasoline prices up to almost $3.20 per US gallon, says the latest Lundberg survey of 7,000 gas stations nationwide.
The consultancy expects a further 20-30¢ hike by mid-April.
"Despite the possibility of another spike we advise watching the Gold Market closely and with some skepticism," says the latest Precious Metals Weekly from Heraeus, the German refining group.
"As usual a due correction will come when everyone is speculating on further rising prices – and normally in such a situation it proves then to be quite painful for the owners of long positions."
Mainstream advice remains bearish however, with The Economist 's latest comment claiming that "Gold is enjoying a speculative surge. Beware."
But "we don't sense that the broader investor base is paying much attention here," counters Sean Boyd, CEO of Agnico-Eagle – the Canadian gold mining stock.
"I think that's still to come," he told South Africa 's Mining Weekly on Friday. "There's a lot of factors that are lining up here to see much higher prices."
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 2008
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