Gold spikes to new 16-month high on US retail data & struggling UK bank panic

Spot Gold Prices pulled back from a 16-month high against the Dollar late in New York on Friday, but ended the week trading just more than 1% higher from last Friday's finish after US retail data showed a drop in Aug.

Equity investors were spooked as anxious depositors withdrew their money from Northern Rock, the struggling UK bank, pushing the top 300 stocks in Europe more than 1% lower for the day on average. New York's major indices
rebounded from an initial sell-off to end the week 2% higher from last Friday.

Despite having just 0.24% of its assets exposed to the subprime US housing market, Northern Rock's stock plunged by one quarter at the London Stock Exchange in early trade after it said the Bank of England is stepping in to support it with a short-term loan as "lender of last resort".

Northern Rock now accounts for one-in-every-five UK mortgages. The Pound sank on the currency market to a 13-month low versus the Euro, and it lost nearly three cents for the week versus the Dollar to $2.0061. The Sterling Price of Gold broke through £356 per ounce to hit a new 16-month high before slipping back to £353 per ounce by the close in London, a 1% gain for the week.

That took the metal's gains since Jan. to more than 14%. The FTSE100 stock index today turned negative for the year to date.

Against the Euro, the Dollar rose slightly despite Aug.'s retail sales coming in 0.4% below July's figure. Analysts had expected a 0.2% increase. The greenback continued to trade near a 15-year low on its trade-weighted index, however, and the Dollar has also hit a three-decade low versus the Canadian Dollar.

Business with Canada accounted for more than 18% of total US trade in 2006. The price of gold in Canadian Dollars slipped earlier to a 5-session low of C$728 per ounce before bouncing as gold was bid higher in New York trade. The Euro Price of Gold this morning dipped below €508 per ounce for the first time in a week, before spiking and then ending the week €2.50 higher per ounce at €511.50.

In the commodity markets, crude oil slipped further below $80 per barrel overnight as Hurricane Humberto eased its windspeeds on the Texas/Louisiana coast. Wheat futures lost 2% – their third session of losses – amid what one Tokyo trader called "a technical correction" following Tuesday's fresh all-time highs.

On the data front this morning, Germany – the world's third largest economy – reported no change in its rate of Consumer Price Inflation, holding at 1.9% annually in Aug., supporting the European Central Bank's decision not to raise its interest rates last week. The broader Eurozone's CPI for Aug. also came in as forecast at 1.7%.

Ahead of those US retail numbers, US Treasury bonds – the "safe haven" of choice for large institutions since the turmoil in world credit markets began in late July – looked set to record their first weekly loss in a month. Early in Frankfurt today, the yield on 10-year US bonds stood eight points above last Friday's close at 4.46%.

"I'm recommending shorting bonds," says the chief economist at Daiwa Securities in Tokyo. "The deterioration in the US economy is only in the housing market, not in consumption."

But the prospect of subprime "containment" has now taken a dent from the turmoil at Northern Rock in the UK.

In the gold mining sector, meantime, shares in Gabriel Resources lost 25% after Casey Research – a leading gold-mining tipsheet – advised selling the stock on news that GBU must delay a key report on the environmental impact of mining at Rosia Montana in Romania, one of the world’s largest undeveloped gold deposits with 15.8 million ounces in likely reserves.

GBU has been awaiting final approval from the Romanian government for several years, a move challenged in the courts by an environmental pressure group funded by George Soros, the Hungarian billionaire.

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