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Gold Safe Haven Play as Credit Crunch Hits Banks Again

Commodities / Gold & Silver Jun 03, 2008 - 08:30 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES slipped 0.5% as the US open drew near on Tuesday after touching yesterday's three-session high of $897 per ounce early in London .

The European single currency – celebrating its tenth anniversary this week – also rose to its best level vs. the Dollar since Thursday, hitting $1.5630 on the currency markets.


The broad Reuters-CRB index of 17 key commodity prices crept 0.8% higher, but crude oil slipped back after breaching $127 per barrel.

Yesterday the US Energy Information Administration (EIA) forecast oil prices will hold above $100 per barrel to the end of 2009, if not longer.

"The tone in the Gold Market right now is one of cautiousness," says today's note from Mitsui, the bullion dealer, in London .

"The European interest rate decision is due on Thursday, and with inflation concerns looming large, the most likely outcome is unchanged. This could provide some modest support to precious metals."

Asian stock markets fell hard yet again, meanwhile, taking India's BSE30 index almost 3% below last week's close after the prime minister, Manmohan Singh, said his government has "no option" but to cut subsidies on fuel prices, letting the higher cost of crude oil feed through to consumers and business.

In Tokyo the Nikkei index lost 1.6% as Japanese traders caught up with the credit-rating cuts made by Standard & Poor's in New York on Monday to Morgan Stanley, Merrill Lynch and Lehman Brothers.

Last night the KBW Index of US financial stocks closed at a five-year low.

Monday also saw Wachovia Corp. – the fourth largest US bank – force its chief executive, Kennedy Thompson, from his job.


This morning in London Bloomberg reported that Bradford & Bingley – the eighth largest bank in Britain – is obliged under the terms of a 2006 deal to buy £2.1 billion ($4.1bn) of low-quality mortgages from General Motors' finance division, GMAC.

The former building society – which has been forced to sell one-quarter of its equity to a private US fund after hitting trouble with a £300m ($5909m) rights issue – is also obliged to buy £2bn of home loans from Kensington Group, a UK specialist in "self certification" mortgages, otherwise known as "liars loans".

Bradford & Bingley's chairman, Rod Kent, admitted to making "too many mistakes recently" as he issued a profits warning yesterday and knocked 24% off the bank's stock-market value.

"We are starting to see troubles in the financial system again," noted Mario Innecco at MF Global earlier today.

"Gold is moving up against everything...rising more as a safe-haven play."

In Japan and Asia overnight, the cost of credit-default swaps – a measure of fears about the risk of default by corporate borrowers – rose to a six-week high.

"Investor risk aversion could increase," says Manqoba Madinane at Standard Bank in Johannesburg , "which could further boost precious metal investment as equity and bond markets fall out of favor."

Today the Wall Street Journal reports that Lehman Brothers – which raised $4 billion in fresh capital during the first three months of this year – may be looking to raise another $3-4 billion to "help shore up its balance sheet."

( Read more about Gold & Credit Default Risk here... )

On the economic front today, inflation data from Switzerland showed consumer prices rising by 2.9% last month from May 2007 – the fifth month running that inflation has outpaced the Swiss National Bank's target of 2.0%.

New building activity in the United Kingdom was reported sharply below forecast. European economic growth during the first quarter came in at 2.2% anualized.

But input prices for Euro businesses hit 6.1% in the year to April, the Eurostat agency said – the fastest pace of Producer Price inflation since the European single currency was launched 10 years ago this week.

"This relatively short period of time has been rich in successes," claimed European Central Bank chief Jean-Claude Trichet in a speech yesterday.

"These accomplishments call for celebration, for reflection and also for continuous efforts as regards the future."

Trichet speaks again today at the IMF's Central Bankers' Panel in Barcelona , as do Bank of Japan governor Masaaki Shirakawa and US Fed chairman Ben Bernanke.

"The Fed is being attacked for cutting rates too far and causing an oil price spike," notes an editorial from the Financial Times .

But despite US interest rates now standing fully 2.0% below the rate of consumer-price inflation, "this criticism is wrongheaded," the FT concludes, a position supported Paul Krugman, economics professor at Princeton and a former colleague of Ben Bernanke.

"We don't need higher interest rates to get inflation under control," writes Krugman on his blog for the New York Times .

"When the surge in commodity prices levels off – and it will; the laws of supply and demand haven't been repealed – inflation will subside on its own."

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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