Gold News

Gold recovers as "credit crunch" leads private investors to seek safe haven

Spot Gold Prices rose strongly in late London trade Wednesday, adding $6 from the day's low to recover Tuesday's close just shy of $670 per ounce.

Global stock markets also recovered an earlier dip, as the  Federal Reserve made short-term loans of $7 billion to the US money market in an attempt to cap interest rates and keep liquidity flowing between the biggest investment houses.

"A lot of people misunderstand gold as a safe haven and expect it to react immediately," said Jill Leyland, economic advisor to the World Gold Council today. "It's more of an insurance people buy when they are worried."

The WGC reported on Wednesday that global gold demand rose 19% to 922 tonnes between April and June from the same period last year. Indian gold consumers, the world's largest buyers of physical gold, bought 317 tonnes – nearly half of the world's gold mining output during the second quarter.

Chinese gold demand rose by nearly one third in tonnage terms, led by the auspicious Year of the Pig festivities. Middle Eastern gold sales rose by a fifth, while Russian gold consumption increased by 27%.

"I am pleased to note that the Dollar value of gold demand has more than doubled in just four year," said CEO of the World Gold Council, James Burton. Most striking about the WGC's latest data is the fact that emerging-market gold demand grew even as the Gold Market was both historically high and volatile – typically a strong deterrent for Indian and Asian consumers – during the second quarter.

In the global securities market, meantime, Wednesday marked the deadline for hedge-fund investors wanting to withdraw funds before the end of the third quarter in 45 days' time. "Everyone always waits until the last second to get out, and [Wednesday)] is the last second," said Mike Hennessy of Morgan Creek Capital to Reuters. Redemption notices began “piling up weeks ago” according to the newswire after the collapse of Bear Stearns highly-geared mortgage bond hedge funds sparked the current turmoil in world financial markets.

"The longer this credit crunch goes on, the more likely that gold will attract safe haven buying," said John Reade, head of metals trading at UBS in London today. In the short-term, "we do not expect institutional buying of gold to trigger any sharp move higher; we suspect that position closing and de-leveraging will be the focus of these investors' attention.

"[But] any move to gold will probably come from private investors. As such, the listed exchange-traded funds in gold will signal this interest."

Confirming the move into gold by a growing number of concerned private investors, the StreetTracks gold ETF reported a record holding of more than 510 tonnes on Tuesday. In London, the gold fund run by ETF Securities saw a trebling of holdings last week. Some 200,000 ounces of gold was bought in one day, according to AFX News.

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Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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