Gold recovered one-third of yesterday's $18 plunge early Wednesday in London, as crude oil slid to a three-week low and European stock markets dropped 2%, led lower by mining and banking shares.
The Euro ticked higher against the Dollar, regaining a quarter of its two cent drop – also sparked by Ben Bernanke, chairman of the Federal Reserve, merely noting the inflation risks posed to the US economy by its weak currency exchange rate.
"Bernanke's remarks strengthened speculation that the Fed may not cut interest rates further," says Shuji Sugata at Mitsubishi Futures & Securities in Tokyo, "preventing investors from putting money into commodities."
"With interest rate futures now pricing in a 98% probability of the Fed holding rates constant this month," agrees Manqoba Madinane in today's Gold Market note from Standard Bank, "plus a 30% probability of increasing rates by 25 basis points in October, we see the Dollar well supported in the near term.
"That could further contain near-term precious metals demand.
"Furthermore, equity index futures are also pricing in near-term gains in the US and Asia, which could see money flowing into equities."
Money flowed out of European stock markets on Wednesday, however, with the Cac40 in Paris and FTSE100 in London both losing 2% by lunchtime.
US stock futures pointed lower after the Financial Times said that Lehman Brothers – the fourth-largest US bank – lost $500-$700m in the last three month on "certain hedging positions".
The Wall Street Journal reports that, contrary to Lehman's own statements, the bank is looking to raise fresh capital from big foreign investors, already approaching "at least one" fund in South Korea.
The central banks of both Sweden and Norway warn that "the [subprime] turmoil has spread to new assets, markets and participants. The uncertainty...will probably persist for a long time to come."
Here in the United Kingdom, "ongoing economic weakness in 2009 would argue against fiscal restraint," says the Organization for Economic Co-Operation & Development (OECD) in its latest UK report. But "the government's options have been limited by excessively loose fiscal policy in past years when economic growth was strong."
The OECD forecasts a 10% drop in UK house prices by the end of 2009. Today the British Pound slid to a two-week low beneath $1.9535, helping the Gold Price in Sterling move back above £450 per ounce.
"It looks to me as if foreign central banks and sovereign wealth funds are losing faith in the UK," said Michael Saunders at Citigroup yesterday after the Bank of England reported non-residents selling gilts and Treasury bills at the fastest rate in five years.
Foreign investors funded some two-thirds of the UK's current-account deficit between 2005 and 2007, Saunders told the Financial Times.
"I would say Gold is still in a range of $850 to $900 for the time being," said a dealer in Hong Kong to Reuters overnight, "We are all waiting for Friday's [official] US non-farm payrolls data."
Today brings the monthly ADP report of private-sector US payrolls, expected to show a loss of 30,000 jobs in May.
Early today the Mortgage Bankers Association (MBA) reported a 15% drop in US mortgage approvals for last week. Compared with the final week of May 2007, approvals stood 20% lower.
Tuesday's two per cent plunge in the Gold Market came after Fed chairman Bernanke said that the plunging US currency might lead to inflation inside the United States – a "highly unusual" move, as John Authers notes for the FT, "since the Fed does not have responsibility for the Dollar.
"That was taken as a hint by the foreign exchange market that government intervention could be on the way."
The drop also came as trading began in options on New York's GLD exchange-traded gold fund – formerly known as the StreetTracks ETF and now called SPDR.
"Trading got off to a fairly solid start," notes Chris Tyler for Optionetics, "although much of the activity had the earmarks of institutional players."
The most active contracts – "sporting a slightly bearish outlook" – were put options dated for July and Sept. They give their owners the right to sell the GLD fund at an equivalent Gold Price of $850 an ounce.
December puts pricing gold at $770 an ounce also saw volume exceed 2,000 contracts.
"With Gold falling below $880 you would expect global physical demand to be strong," says today's comment from Mitsui, the precious metals dealers in London. However, this is not the case.
"It seems that several key consumers of gold are reporting less than expected levels of demand. That leaves the market to look at technical support levels, and the key support is $845."
Despite Ben Bernanke's apparent threat of higher US interest rates ahead, however, US Treasury yields moved lower on Wednesday as investors bid bond prices higher.
As the New York opening drew near, 10-year US bond yields slipped to 3.86% and two-year yields fell to 2.39%.
The rate of consumer-price inflation in the US was last pegged at 3.9%.
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