Gold News

Gold Slips to New 13-Week Low as "Worst is Over" in Credit Markets, Says Bank of England

Gold continued to slide early Thursday, falling below Wednesday's 13-week low to trade at $862.40 per ounce as bond yields ticked higher following yesterday's 0.25% rate cut from the Federal Reserve in Washington.

With continental Europe closed for the May Day holiday, the London stock market was little changed in thin trade, while the British Pound held onto its overnight gains vs. the Dollar above $1.9850.

The Euro meantime slid to a new five-week low beneath $1.5500, capping the slide in Gold Prices for European investors above €554 per ounce.

Asian stock markets closed the day 0.6% lower on average.

"The [Fed's accompanying] statement was very economic neutral," reckons Zachary Oxman, senior trader at Wisdom Financial in the US, "and still seemed to focus on the risk of inflation

"I'd watch for Dollar weakness and Gold strength."

But "the risk is more [about how] much Gold might go down if the Dollar fails to weaken," counters Stephen Briggs, an economist at SocGen's corporate & investment banking division, "rather than how much it will go up if the Dollar weakens."

"There is a certain investor fatigue that has crept in the market in the last few weeks and I think it is going to take a bit of oomph to get it going again." (What might the Fed's latest decision mean for the Dollar? Read Crisis Over; Next Crisis here...)

Peering into the data, "longer-term gold holders are exiting long positions," believes John Reade, head of metals analysis at UBS in London, "perhaps rotating back into equities."

Reade points to this week's sharp reduction in the Gold Bullion held in trust on behalf of exchange-traded fund (ETF) investors, most spectacularly in the United States.

The LyxOr GBS fund traded in London, Frankfurt and Paris has sold almost 15% of its gold holdings since reaching a peak of 99.5 tonnes in mid-March.

The StreetTracks GLD fund, listed in New York but storing gold – through a trust agreement – in bank vaults in London, has shrunk by 12.5% to hold 580 tonnes.

On Monday alone GLD cut its holdings by almost 11 tonnes of gold as investors sold out of the fund. According to data from the London Bullion Market Association, that liquidation was equal to around one-third the average daily volume traded by the professional Gold Market in London.

"The recent sell-off in gold may turn out to be the first ever ETF-led correction," says Reade, "although we will only be sure after the release of the Commitment of [gold derivative] Traders report on Friday, when we can measure the relative sizes of the ETF and futures market liquidation."

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Straight after the Fed's interest-rate announcement on Wednesday, the Gold Price began rising 2% to a peak of $881.43 as Hong Kong opened for business this morning.

But the rally failed to hold in thin London trade, with the down-trend starting mid-April running lower.

In the broader markets, meantime, "Worst is over" says the Financial Times today in summarizing the latest Quarterly Report from the Bank of England here in London.

Studying the likely default rate on US mortgage investments, the Bank believes the credit markets currently "overstate the losses that will ultimately be felt by the financial system and the economy as a whole."

In particular, the Bank says the total global losses of $945 billion forecast by the International Monetary Fund (IMF) are "misleading", since they "confuse true credit losses and losses implied by market prices."

Despite Wall Street's muted response to the Fed's latest rate cut – the seventh cut in eight months – the biggest US bank, Citigroup, increased its latest rights issue by 50% to $4.5 billion late Wednesday due to apparent "investor demand".

What's more, claims Mark Zandi – chief economist for Moody's at Economy.com – "with the Fed on hold and the Dollar firming, oil and gasoline and food prices may all top out some time in the next few months."

Crude oil prices today slipped back to $113.18, down from almost $120 per barrel at the start of this week.

Cocoa rose together with sugar and coffee; corn and soybean prices – source of food riots and protests in 16 separate countries already this year – rose for the second day running.

"The Fed may have gotten to the point where it could start hurting economic prospects in terms of the value of the Dollar and oil prices and grain prices," believes Sung Won Sohn, a professor in economics at California State University.

"I think it was time for the Fed to slow down and take a pause."

If the Fed does indeed go on "pause" after cutting the cost of borrowing Dollars to 2.0% yesterday, it has already pushed the real rate of interest below zero for four months running after accounting for inflation.

Based on the most recent CPI data, Wednesday's decision from the Federal Reserve takes real interest rates down to minus 1.8% – the worst rate of return for Dollar savers since June 2004.

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Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are 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. Please review our Terms & Conditions for accessing Gold News.

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