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Gold Slides with Stocks as Governments Go on Bank Debt Binge

Commodities / Gold & Silver Oct 15, 2008 - 08:44 AM GMT

By: Adrian_Ash

Commodities Best Financial Markets Analysis ArticleSPOT GOLD PRICES slipped 1.7% into the US opening on Wednesday, dropping back to $833 an ounce for the fourth time in a month as the Dollar bounced on the forex market and world equity prices sank for the sixth time in 11 sessions.


The Nikkei stock index in Tokyo proved the exception, rising 1% to regain two-fifths of October's losses to date while other Asian markets lost 3%.

Shares in France and Germany sank at the opening in Paris and Frankfurt, giving back one-quarter of their historic 14% surge from Monday and Tuesday.

The FTSE100 here in London slid back to 4,245 – a level first reached 12 years ago.

"With the precious metals trading in the middle of recent ranges," says today's Gold note from Mitsui, the bullion dealer, "it seems that the market is waiting to digest the impact of the world's central bank activities.

"The money markets are slowly beginning to operate again but concerns have now quickly turned to recession fears."

Today the central bank of Iceland slashed its key interest rate from 15.5% to 12.0%, forcing a fresh 6% drop in the Krona vs. the US Dollar.

The Icelandic currency has lost almost one-third of its foreign-exchange value in the last 90 days, as the country effectively declared itself bankrupt after the state-funded rescue of its major banks.

"Over-reliance on interest rate policy in this environment does little to solve the problems at hand," said US policymaker James Bullard of the St.Louis Fed in a speech in Memphis, Tennessee on Tuesday.

"Rate cuts are by no means a panacea," agreed his colleague Janet Yellen, head of the San Francisco Fed, "but the outlook for the US economy has weakened noticeably."

"Virtually every major sector of the economy has been hit by the financial shock."

Today the World Bank opened a $10 billion "standby fund" to help the poorer members of Asean (the Association of South-East Asian Nations) with aid from Japan, China and South Korea.

The 27-member European Union is meeting in Brussels to approve a €3 trillion facility for supporting the region's over-geared banks.

In the United Kingdom – where the number of new home-loans has sunk to its lowest level since autumn 1974 – the government has made its £37 billion bail-out ($65bn) of the largest banks dependent on "maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels," says the Treasury.

Last year's net lending to private borrowers totaled £242 billion ($426bn) – more than twice the previous decade's annual average.

"Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline,'' said Jean-Claude Trichet – head of the European Central Bank (ECB) after delivering a speech to the Economic Club of New York on Tuesday.

"It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.''

Founded in 1999, the ECB set out with a "disciplined" target for money-supply growth of 4.5% per year. It last met that ceiling in 2001, however, with a three-decade peak in broad M3 money growth of 12.4% in Dec. '07.

Regardless of the fresh surge in Euros supplies now promised by the Eurozone deal, the single currency earlier rose to $1.3680 vs. the Dollar before slipping back. The British Pound retreated from a fresh attempt to push above Tuesday's one-week high above $1.7600.

The Gold Price in Sterling meantime slipped 2.1% to £475 per ounce. For French, German and Italian investors looking to Buy Gold , the price dipped 1.7% to €613.

"Until [open market] money market rates drop, volatility in precious metals will be par for the course," says Walter de Wet for South Africa's Standard Bank today.

"Crude oil perhaps demonstrates best that real growth is going pear-shaped," he adds, noting that energy prices have continued to tumble – now down below $78 per barrel of WTI sweet and light – despite the Opec oil cartel threatening to cut production.

"All this is bearish for platinum group metals and silver," de Wet says, "because they depend so heavily on real demand for support."

Today's US data could also impact these more Industrial Metals vs. Gold , he goes on, with Retail Sales expected to show a fall of 0.6% last month from August.

Here in the United Kingdom, the latest jobless figures show the fastest gain since 1991, with the unemployment rate rising to an eight-and-a-half year high of 5.7%.

In the 12 months to August, almost twice as many workers took part in strike action as during the previous year, resulting in the loss of over one million working days. The redundancy rate rose to 5.8 per 1,000 workers.

Average earnings growth (including bonuses) slowed to 3.2% per year, precisely 2% below the rate of inflation in consumer prices.

"When you give [the banks] a stronger capital position – and you also provide a certain amount of government backstop to their funding sources – it's incumbent upon them to go out and continue to lend," said US Treasury assistant secretary David Nason to Bloomberg TV late Tuesday.

"Government owning a stake in any private US company is objectionable to most Americans – me included," said his boss, Henry Paulson, after recapitalizing the nine largest US banks by taking a $250bn stake in their equity.

"Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

US wage growth – last pegged at 3.4% per year – has lagged consumer-price inflation since 2004.

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.

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