Gold News

Gold: Israeli War Rumor, New Oil Record & Fresh Banking Scare Drive "Crisis-Proof Metal" to Bear Stearns High

Gold Prices shot to a 20-week high early Friday in London, jumping 3.0% from yesterday's low as European stock markets fell for the sixth time in nine sessions and crude oil rose $4 to a new record high of almost $146 per barrel.

The Jerusalem Post quoted Iraqi sources saying that Israel is practicing and preparing air strikes on nuclear sites in Iran, while banking stocks plunged on new fears of failure at a major institution.

Trading above $957 per ounce, Gold reached it best level since its all-time highs above $1,000 hit on the Bear Stearns collapse in mid-March.

"Investor confidence in commodities could accumulate further support, given that financial systemic risk continues to hold steady," adds Manqoba Madinane at Standard Bank in Johannesburg.

"Investment grade credit spreads [a measure of financial risk] are trending sideways.

"Precious metals should remain well supported today but might stagnate in New York as investors look to consolidate positions ahead of the weekend."

Calling Gold "the crisis-proof metal", the Austrian Erste Bank – a major player in central Europe – recently told clients that "gold investors will encounter a highly attractive opportunity/risk profile in 2008 and beyond.

"Passing $1,200 is the first target, and in the long run the price may well pass the inflation-adjusted all-time-high of $2,300."

"The strong increase in jewelry demand from India and the Middle East, falling volumes sold by central banks, and the continued decrease in mining output – to name just some factors – are responsible for the gold bull market," believes Ronald-Peter Stöferle, global equities analyst at Erste Bank.

Yesterday the World Gold Council reported that European central banks – party to a Gold-Selling Limit since the huge reserve sales by Switzerland and the UK starting in 1999 – have sold only 297 tonnes of gold since Sept. '07, well short of their annual ceiling of 500 tonnes.

Global gold mining output peaked in 2000 and has so far failed to react to the trebling of US-Dollar Gold Prices.

Yesterday the official data agency in South Africa – formerly the world’s No.1 gold mining nation – said its output continued to decline in May, falling 11.6% year-on-year.

South African gold production has more than halved over the last decade.

"The ongoing concerns over the state of the US financial sector have weighed on the US Dollar," notes Mitsui, the precious metals dealer here in London, "pushing the Euro back up towards $1.58 and offering additional support to Gold."

On Wednesday this week former Federal Reserve president William Poole declared Fannie Mae and Freddie Mac – the government-sponsored mortgage companies behind $5 trillion in US home loans – to be "technically insolvent".

Challenged in an interview with Bloomberg News that "technical insolvency" merely refers to the current market price of otherwise sound mortgage-backed investments, "Keep in mind that the Savings & Loans industry was technically insolvent in the early '80s and ended up in fact insolvent later on and they had to be closed down," Poole replied.

"What you want to do is operate on the very best estimates of assets and liabilities, and that's what fair-value accounting attempts to do," he went on, before calling for both Fannie & Freddie to be nationalized by the federal government.

Here in London today, senior executives from the UK's largest banking groups met with the Bank of England to request an extension of its support for the financial markets.

According to The Times, the banks want the Special Liquidity Scheme – launched in March and offering £50bn in government bonds in exchange for otherwise un-sellable debt investments – to cover new mortgage-backed securities issued since the start of this year.

A similar scheme at the European Central Bank (ECB) has effectively kept new home-loan lending alive in Spain during 2008, with the ECB accepting €46bn in mortgage-backed securities by end-May.

The issuance of new Mortgage-Backed Securities Reversed that month in the UK, with anxious investors returning £4.6bn in previously securitized debt to London banks.

Shares in the UK banking sector – which has lost one-third of its stock-market value already in 2008 – plunged yet again today, dragging the FTSE100 index more than 1.6% lower by lunchtime.

Over in New York, "[Thursday's] scare at Lehman Brothers showed us all what a bank-run would look like," reports Dealbreaker, the self-styled "Wall Street gossip" site.

"The stock plunged 22% while credit default swaps blew out to deathwatch levels."

Lehman's plunge came on rumors that major investment institutions, including Pimco – the world's largest bond fund – are walking away from existing deals with America's fourth largest bank, fearing their "counter-party risk" should it go under.

Pimco boss Bill Gross went live on CNBC to deny the story.

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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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