Gold Prices & Leasing Rates Jump as Bush Moves to Rescue Sub-Prime Housing

By: Adrian_Ash

Treasury Bond Holders Face Surge in Supply

SPOT GOLD PRICES rose strongly throughout the Asian and early London sessions on Friday, gaining nearly $5 per ounce to reach a new high for the week, as President Bush announced a rescue package for subprime US home buyers.

Effectively offering to nationalize the mortgage market for low- and no-income borrowers, Bush's bail-out plan is likely to force a steep increase in US bond issuance. The "safe haven" of choice for large investment institutions during the turmoil in this month's credit markets, Treasury bonds now risk serious, long-term inflation.

Bush's plan will run for at least two years according to an early press briefing.

As bond prices fell ahead of the long Labor Day weekend in the United States , ten-year US yields rose five points higher to 4.56% overnight. Two-year US bond yields rose ten points 4.20%, while one-day Dollar deposit rates in Tokyo jumped 45 points to 5.65%.

In London 's gold market this morning, the interest rate charged on 12-month loans of gold rose to 0.449% above interbank Dollar lending rates, the widest gap since Nov. 2003.

Friday also brings US consumer income and spending data at 08:30 EST , plus a speech on housing and monetary policy from Ben Bernanke, chairman of the US Federal Reserve, at the central banking summit in Jackson Hole , Wyoming .

"Market focus is likely to be mainly on Bernanke's speech," says ABN Amro in a note this morning. "Given recent market volatility, there is a much higher probability that Bernanke will address the Fed's latest thoughts. We suspect that Bernanke will not want to close any doors."

As money came out of US bonds early Friday, the Nikkei stock index in Tokyo shot higher to close 2.6% higher for the day, while Hong Kong reached a new lifetime high. Dow Jones index futures traded in Frankfurt rose to signal a 0.4% opening gain. Here in London , the FTSE100 put on 0.45% during the first hour of trade, even as Barclays – the UK 's third largest bank – admitted it had to tap the Bank of England for an emergency $3.2 billion loan on Wednesday. It had already tapped the BoE for a $630 million loan last week.

Back in the gold market, Japanese gold futures traded at the Tocom for Aug. '08 delivery gained 1.1% to equal $673.90 per ounce, while the Yen continued to slip back on the currency markets. The Dollar rose to regain Monday's opening level of ¥116.30, but it slipped lower against the European currencies.

The Euro traded above $1.3680 by lunchtime in London . Sterling 's rally pushed to a new high for this week above $2.0200, but gold still pushed to a new high for the day of £332.21 per ounce. For French and German investors wanting to Buy Gold Today , the price touched €490 per ounce, more than €13 above last night's low.

"Risk minimization is the flavor of the month & will continue to be served until some certainty on the subprime fallout becomes apparent," says Brandon Lloyd in today's technical gold-market note from Mitsui. "Close attention will be on today's US inflation figures [due at 12:30 GMT] as dealers look for further signals on what impact the subprime woes are having on the US economy."

The economy of India , meantime – where one in every five ounces of Physical Gold sold worldwide was bought in 2006 – continues to accelerate, according to data released this morning. GDP grew 9.3% in the second quarter of this year, outpacing the Jan. to Mar. period's 9.1% rate of growth.

"Asian growth and exchange-traded gold demand should prove a more lasting feature of the gold market," said Morgan Stanley in a report yesterday. "Much of the support from traditional demand-side fundamentals will persist, with new fundamentals pushing Gold Prices higher."

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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