Gold News

Gold Surges on Chinese Dollar Comment; Bond Yields Slump & Finance Stocks Fall as Global Credit Crisis Deepens

Gold Prices continued to surge past fresh 27-year highs early Wednesday, adding another $23 to Tuesday's $18 gain before slipping back to bounce off $838 per ounce by mid-morning in London.

Crude oil rose beyond $97 per barrel – and base metal prices also gained – as the US Dollar sank yet again following comments overnight from Cheng Siwei, vice chairman of China's Political and Consultative Conference.

"In the current foreign reserves structure, I mean the bonds we bought, the Euro is appreciating against the Yuan while the US Dollar is depreciating.

"We should take advantage of the strengthening Euro to compensate."

The news pushed the Euro today to new lifetime highs above $1.4700. The British Pound leapt to new quarter-century highs of $2.1050 despite an open row between Mervyn King, head of the Bank of England, and the UK Treasury over who's to blame for the collapse of Northern Rock in Sept.

The over-geared mortgage lender suffered the first banking run in the United Kingdom since 1876. (Has the world now lost all confidence in its central bankers? Keep reading here...)

The new surge in Sterling and Euros was outpaced by gold once again, however. The Gold Price in Euros rose more than €10 from last night's US close to its highest level since Sept. 1983. For British investors wanting to Buy Gold Today, the metal moved above £400 per ounce for the first time in history.

That price stands more than 150% above the level at which Gordon Brown – now the British prime minister – sold half the UK's stock of monetary gold bullion in 1999.

In the financial sector this morning, European stock markets traded 0.7% lower after Tokyo's Nikkei index dropped 0.9% for the day, its fifth loss on the run.

Banking shares led the early falls after it was reported that Standard & Poor’s and Moody’s – the global credit ratings agencies – have just received default notices for $5 billion worth of mortgage-backed bonds.

The US Treasury's $75 billion bail-out scheme for the subprime mortgage-bond market, meantime, is now "dead in the water," according to one senior Wall Street banker.

"It was the 1988 Basel Accord that first created the opportunity for regulatory arbitrage," says John Plender in today's Financial Times. "Banks could [now] shunt loans off the balance sheet...creating a parallel banking system whose lack of transparency explains the market seize-up since August.

"The Basel II regime, which takes effect in January, makes securitisation less attractive to banks and seeks to address contingent risk. [But] Basel II relies on the modelling techniques that led to the subprime disaster."

Société Générale, the second largest bank in France, today admitted to a 12% drop in third-quarter profits after writing down bad debts at its fixed-income division. In Japan, Orix Corp. – the country's biggest non-bank finance firm – said today that its half-yearly profits slumped by 27%. The price of insuring corporate bonds issued by Citigroup, Wachovia and Morgan Stanley, meantime, rose this morning to near five-year highs according to Bloomberg data.

"The price move of crude oil is unprecedented and no one knows when the sub-prime problem will end," noted a gold analyst in Tokyo this morning.

"This has made funds look for gold and other commodities."

Institutional investors are also bidding up bond prices, however, seeking a "safe haven" in government debt despite the fast-shrinking value of official currencies worldwide.

Bond yields fall as their prices rise, and 10-year German bunds – the European benchmark – are now offering investors only 4.15% per year, down three basis points for the day so far.

British government gilts today offer just 4.97% per annum on the two-year and 4.86% on the 10-year bond. The Bank of England's current target rate is 5.75%.

Two-year US Treasuries neared today's Wall Street open yielding just 3.62% per year down 10 basis points for the day so far. And despite the US Dollar losing more than one-third of its value against the world's other major currencies since spring 1978 – and despite a loss of domestic US purchasing power of nearly 70% over that time – the Treasury Department is set to auction $5 billion of 29.5-year bonds on Thursday.

Just who expects the US Dollar to have any value at all by May 2037 is unclear. But at the last sale of these long-dated bonds in Sept., the auction drew bids worth nearly three times the amount on sale. The previous sale was over-subscribed 2.30 times in August.

(What will happen to gold if inflation over-takes bond yields once again? To find out What's Really Driving the Gold Price Higher, click here now...)

Unlike paper money and government promises, meantime, physical Gold Bullion is becoming ever-harder to produce.

"Our studies indicate the long-term global gold production will begin to decline as the diminishing number of new reserves fails to compensate for dying mines," says David Davis, research analyst at Credit Suisse Standard, in his latest Gold Market note.

On the demand side, meantime, the Shenzhen Development Bank today began trading gold bars on behalf of individual Chinese investors. A competitor, Industrial Bank of Fujian Province, first opened the Gold Market to private citizens in China in July.

Investors in India – already the world's hungriest market for physical gold bullion – are also being offered greater access to Gold Investment.

State Bank of India has just started to sell gold coins to retail investors through its national network of 100 branches, while MMTC in New Delhi is planning to launch India's fourth national commodities exchange, offering contracts in gold, silver, copper, base metals and agricultural goods.

In the Indian jewelry market, dealers report mixed trade as Gold Prices surge to new all-time highs against the Rupee. Sales have been "undermined by scrap gold which has flooded the market," according to Prithviraj Kothari of Riddi Siddhi Bullion in Mumbai.

But overall for 2007, says the World Gold Council's local office, total Indian demand for physical gold will rise by 10-15%.

"Diwali [the autumn festival of lights taking place this Friday] acts as the important ingredient that allows Indians to indulge in gold," the WGC said today – "whether as gift, investment or a deserved personal treat. More Indians are subscribing to the belief of gold being the ideal valuable gift."

Looking to Buy Gold as a valuable gift for your own investment portfolio? For the tightest prices – live online – plus secure storage of your gold in Zurich, New York or London from just $2 per month, be sure to visit BullionVault and claim a gram of Free Gold today...

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.

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