Gold Bounces from Near-5% Plunge as Dubai Panic Hits Asia, Threatens Eurozone Banks
The price of Gold sank into the close of Asian dealing on Friday, dropping 4.7% from Thursday morning's new all-time high above $1195 but quickly recovering one-third of that loss as London opened.
Gold's drop – its fastest move since March 17th – mapped sharp falls in Asian stock markets, which extended yesterday's global losses on news of the "debt freeze" requested by the Dubai government for one of its state-owned real-estate investment firms.
Tokyo's Nikkei dropped 3.2%, Seoul 4.7%, Hong Kong 4.8%, and Shanghai 2.4%.
The US Dollar jumped more than 2% on the forex market, bouncing hard from 15-month lows to the Euro and a fresh 14-year low to the Yen.
Typically moving in opposition to Tokyo stock prices, the "safe haven" Japanese currency gained some 2.5% against the higher-yielding Euro, Aussie and Canadian Dollars, and British Pound.
The Gold Price in both Euros and Sterling dumped 3.7% before turning higher, very briefly dipping below €768 and £700 an ounce respectively.
"There was good offer above 1195 which kept a lid on gold," says one Hong Kong dealer's note this morning.
"Liquidity was pretty poor...probably due to New York holiday and traders switching [from Dec. to Jan.] future month."
This week's expiry of December gold options at the Comex in New York saw a position worth 93 tonnes – equal to 13 days of global mining production – fail to meet its target at $1200 an ounce.
Latest data from US regulator the Commodity Futures Trading Commission said that last week, speculative futures and options traders were "net long" of some 970 tonnes – almost twice the 5-year average.
"Our intervention in Dubai World was carefully planned and reflects its specific financial position," said Sheikh Ahmed bin Saeed al-Maktoum, head of the city's Supreme Fiscal Committee, in a statement aimed at reassuring creditors of the United Arab Emirates' other state-backed companies last night.
"The Dollar's rally was to be expected" on Thursday's debt freeze, writes Steven Barrow at Standard Bank this morning. A sharp widening of bid/offer spreads on corporate and government bonds worldwide was also no surprise, he says.
"But if credit spreads continue to widen, we'd question the ability of the Euro to make [further] gains...In June 2009, global banks had international loans of just over US$32 trillion outstanding. Almost half of this is owed to Eurozone banks. [So] when non-domestic credit problems arise, they are more likely to affect Eurozone banks than those in the US."
Averaging almost +0.50 over the last 10 years, the daily correlation between gold and Euros vs. the Dollar shows a strong statistical significance, with the single currency and bullion typically moving together against the USD.
If the Euro and gold moved in lockstep, the correlation coefficient would stand at +1.0; if they always moved in perfect opposition, it would read -1.0.
The correlation between gold and Euros tends to decline when the single currency falls vs. the Dollar, turning negative during gold's strong bull runs of late 2005 and early 2009.
"There is no doubt that the [currency] market has moved too far in one direction," said Hirohisa Fujii, Japanese finance minister, to reporters in Tokyo today.
"Moves right now [in USD/JPY] are extreme, and it would be possible to take appropriate measures," he added – taken to mean central-bank intervention to support the Dollar by selling Yen on the foreign exchanges.
"I would respond flexibly to a joint [G7] statement on currencies."
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