Credit Crisis Hits Gold As Margin Calls Hit Investment Funds
Commodities / Gold & Silver Mar 19, 2008 - 09:56 AM GMTBy: Adrian_Ash
SPOT GOLD and gold futures prices sank as the US open drew near on Wednesday, falling almost 3% to bounce off a seven-session low as oil prices and soft commodities continued to tick lower and European stocks climbed back from an earlier 1.2% drop.
In Australia a major real-estate investment fund today faced a A$30 million margin call (US$27.9m), reports the Herald Sun, while the highly-geared Wesfarmers fund denied rumors it could only re-finance an outstanding US$3.7 billion private-equity debt at 4% above prevailing cash rates.
Here in London , shares in the HBOS – the UK 's largest mortgage lender – fell by 18% at one point, forcing the bank to state that it remains fully able to "access wholesale funding whenever appropriate."
Government bond prices meantime rose sharply from last night's drop, and the US Dollar capped the Euro below $1.5750.
Late Tuesday the Dollar surged 1.2% in response to the Federal Reserve's "mere" 0.75% cut to US interest rates.
"A lot of people were hoping for a full percentage point, so [they] are probably disappointed with 75-basis points," reckons Robert MacIntosh, head economist at Eaton Vance Management in Boston .
"I don't think they should be. Inflation is an issue."
Confounding bond-market hopes of a 100 or even 125-basis point cut, the Fed's Open Market Committee saw two of its ten members vote against Tuesday's reduction.
Charles Plosser, head of the Philadelphia Fed, joined Dallas Fed president Richard Fisher in saying he "preferred less aggressive action." The United States ' key interest rate now stands fully 1% below the latest official reading of US consumer-price inflation.
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Asian stock markets today picked up where the Dow left off last night, adding 2.8% to Tokyo shares and 3.3% to mainland Chinese stocks traded in Hong Kong.
But the Fed's rally faded by the time it reached Europe , where the FTSE100 in London managed to reverse an early 1% drop by lunchtime.
"The Gold Market has already shed much of the gains that had been built up on expectations of a big rate cut," said Harish Galipelli at Karvy Comtrade in Mumbai to the Economic Times of India earlier today.
"Some more downward movement can be expected."
Indian gold futures contracts for April delivery dropped below 13,000 Rupees per 10 grams. Here in London , the AM Fix picked up from Tuesday's post-Fed plunge to come in at $995.25 per ounce, a four-day low for US gold buyers.
Measured in British Pounds at £497.37 per ounce, the AM Fix marked a three-session low for UK investors. Against the European single currency, it came in at a five-day low of €632.14.
Today in London the British Pound dropped back below $2.00 to the US currency – down more than 1.5% from Tuesday's high – on news that two members of the Bank of England's policy committee wanted to cut UK interest rates when the BoE met at the start of this month.
"Indicators of inflation had risen," the BoE's minutes show. But former Home Office secretary Sir John Gieve – whose department failed to maintain "proper financial records" according to an official report – voted to reduce the price of Sterling on March 6th, as did US academic David Blanchflower.
"Gold has always been considered a defensive asset class and a hedge against inflation," notes the Economic Times of India in Mumbai this morning.
"Besides, gold can be liquefied and easily converted into hard currency."
The newspaper's readers agree, adding on its website today that – in their opinion – "this time is good as any to Buy Gold in view of the global slowdown and subprime crisis. With equity markets worldwide tanking in addition to the ever looming threat of inflation, gold offers the best hedge under the present circumstances."
"In India we have been taught since ages [past] that Gold is one of the best forms of savings and a hedge against inflation," says another reader of the Economic Times . "To sum up, investment in gold will never go wrong."
Measured against the Indian Rupee over the last three decades, physical Gold Bullion held for five years has lost value only three times – first during 1985, and then at the end of 1999 and again during 2001.
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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