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Gold Pushes Higher on Massive Government Mortgage Backed Junk Bond Swaps

Commodities / Gold & Silver May 17, 2008 - 07:13 PM GMT

By: Adrian_Ash

Commodities PHYSICAL GOLD BULLION prices rose sharply in London on Friday, gaining 1.1% to reach a three-week high of $894 per ounce as European stock markets pushed higher and US Treasury bonds slipped.

Crude oil regained more than 1.2% to trade above $125.60 per barrel.


"A move to $900 is possible as oil prices remain high," reckons Frederic Panizzutti at MKS Finance, a division of the Swiss refinery group.

"It could happen next week."

Whatever happens to crude oil, advises Ian Harnett at Absolute Strategy Research here in London, "it may be time to be long gold" – because the oil price now stands at a four-decade high relative to bullion prices.

"Only briefly – back in the late summer of 2005 – has an ounce of gold purchased fewer barrels of oil. We expect such a situation is unlikely to last for long."

Meantime on the currency markets, the Euro dropped half-a-cent to the Dollar early Friday on a surprise plunge in Europe 's balance of trade.

Sinking from a positive $1.2 billion in Feb., the 15-nation Eurozone ran up a $3.5bn trade deficit in March. Growth in exports slowed while the cost of energy imports surged.

For French, German and Italian investors looking to Buy Gold as a defense against inflation today, the price moved towards a one-week high above €574.50 per ounce.

Japanese gold prices closed the week in Tokyo at a three-week high, meanwhile, as the Nikkei stock index slipped 0.2% but still ended Friday at its best weekly level so far in 2008.

Japan enjoyed an unforeseen spurt in economic growth during the first quarter, the official data agency in Tokyo said today. Industrial production fell sharply during March, however, down 3.4% from the month before as the strong Yen weighed on exports to the United States .

In the world's largest single market for physical Gold Bullion , "Rupee weakness is acting as a supportive factor for Indian gold futures," believes Ajay Kedia, head of Kedia Commodities in New Delhi .

"Inflation is a problem and for many years now, gold has looked the best hedge," agrees Sunil Kashyap, managing director of Scotia Mocatta's local office.

The Indian government today pegged consumer-price inflation at almost 8% per year.

"We are seeing inflation in India , China and all the major economies of the world," says Kashyap. "That is why there is a good fundamental reason why people should Buy Gold – and if they do, then the price should move up over time."

Shailendra Kumar, head of commodity research at Sharekhan stockbrokers in Mumbai, sees gold rising to 14,000 or even 15,000 Rupees per ten grams by the end of 2008.

Today in New Delhi , over-the-counter Gold Prices spiked up to 12,135 Rupees according to Reuters' data.

"The deepening credit crisis in major developed market economies [plus] soaring oil and non-oil commodity prices all pose considerable risks to world economic growth," warns the United Nations in its latest World Economic update.

The UN now expects only 1.8% real growth in world GDP for 2008, leaving it "teetering on the brink" of a severe downturn.

Here in the United Kingdom , "the consumer will have to be crucified in order to meet the [Bank of England's] inflation target," warns Peter Spence, professor of economics at the University of York and chief economist of the widely-respected Ernst & Young Item Club.

Joseph Stiglitz, the US economist and Nobel prize-winner, agrees. "The weaker economy and higher unemployment that inflation targeting brings won't have much impact on inflation," he believes.

"It will only make the task of surviving in these conditions more difficult."

But while central bankers outside the United States refuse to slash interest rates in line with the Federal Reserve's "reflationary" strategy, they continue to pump money into the banking sector.

That risks an even sharper acceleration in credit- and money-supply growth – now running at multi-decade records in Europe and East Asia .

"The UK's biggest banks are preparing to swap £80bn-£90bn [up to $175bn] of mortgage-backed assets for Treasury bills with the Bank of England," reports the Financial Times today – "nearly twice as much as the central bank originally envisaged when it unveiled its scheme to unblock the frozen bank-lending market."

On Thursday, a governing council member of the European Central Bank – Yves Mersch – expressed "high concern" that banks are dumping risky assets onto the ECB through its special liquidity program.

"[The ECB is] looking very hard at whether there is not a specific deterioration of collateral" for the €445 billion ($685bn) lent to private banks.

"This week Glitnir, the Icelandic bank, is in the process of clearing the use of a €890m collateralised loan obligation (CLO) for funding at the ECB," says the FT .

"Similarly, Lehman Brothers recently structured a €1.1bn CLO, which it is expected to use for [raising] ECB funding."

Structured products including asset-backed securities such as mortgage bonds now account for one-fifth of the collateral accepted by the ECB. Four years ago it represented only 4%.

In the United States , "the 325-basis-point reduction in the Fed's target for the overnight lending rate and the unprecedented [$150bn in] cash pumped into the system [in loans] have helped the economy defy predictions of a recession," says John M.Berry at Bloomberg today.

Accepting everything from Treasury bonds to credit-card debt and lower-grade mortgage-bond assets, the Fed has allowed the M3 measure of US money supply to balloon at a 15% annualized rate, according to John Williams of ShadowStats – the fastest pace since 1971.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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