Gold News

Gold slips as world equities wobble on subprime mortgage-bond downgrades

Spot Gold Prices slipped in early US trade Wednesday, pulling back below $662 per ounce after breaking $666 earlier in London.

Aside from growing demand for Investment Gold, "additional Gold Buying also comes from the strong support around the $650 level," said Pradeep Unni at Vision Commodity Services in Dubai to Reuters earlier.

"Every time gold slips below $650, physical [jewelry-making] demand is seen to creep in. This has been a trend for the last four months."

"The future tone for the Gold Market is strong," agrees Yukuji Sonoda, precious metals analyst at Daiichi in Tokyo. "$650 is the bottom price."

This morning's move in Live Gold Prices came even as global stock markets sold off – breaking the pattern of gold moving in lock-step with equities seen so far in 2007, and following on from Tuesday's 148-point loss in the Dow Jones index on Wall Street.

After Home Depot, the world's largest home-improvement store, forecast an 18% drop in earnings per share, Standard & Poor's warned it may cut the credit ratings awarded to $12 billion of subprime mortgage-backed bonds. Just before the US close, Moody's Investors Service downgraded its ratings on $5.2 billion in mortgage-related debt.

The slump in US consumer spending and house prices today hurt the Nikkei in Tokyo. The Japanese stock index lost 1.1%, led lower by insurance and export stocks, as the Japanese Yen rose against the Dollar on the currency markets.

"It boils down to a fall in US stocks and the stronger Yen," reckons Tsuyoshi Nomaguchi, a strategist at Daiwa. "The market is now watching for a rebound in the US market because that would also bring back the Dollar."

In London, the FTSE100 index stood 0.6% lower by late morning. "It has the taste of what we saw in 1998 with the bond crisis," according to Tom Hougaard, chief market strategist at margin-brokers City Index. "With these subprime mortgage lenders, we are going to be in for a volatile summer."

Government bond prices continued to rise in anticipation that the US Fed will act to bail out US home-owners by cutting its rate of interest. The yield on 10-year US Treasury bonds dipped to 4.99%, its lowest level in a week and 19 points lower since Monday. Ten-year German bund yields dropped 5 points to 4.53%.

Energy prices continued to rise, however, as interest rates fell in the markets. Brent crude oil broke above $76 per barrel late on Tuesday, a new 11-month high, as US gasoline prices rose on news of forced refinery shutdowns in Texas, Kansa and now Indiana.

Speculative long positions in crude oil futures are now at an all-time high, according to Barclays Capital. Net-long positions rose by 43% in the week ending July 3rd.

Back in the Gold Market, the initial move in Dollar prices today was matched by the Sterling Price of Gold, up 0.5% overnight. But for British investors wanting to Buy Gold Today the price then pulled back to reach lunchtime near Monday's lows below £326.40 per ounce as the Pound rose to a fresh quarter-century high against the US Dollar above $2.0350.

French and German investors found the Price of Gold in Euros trading €4 per ounce below the week's high at €482.70 as the Euro rose above $1.3770. The Dax index of German stocks, heavily dependent on manufacturing exports, dropped 1.8% to hit a three-week low despite assurances from the Jürgen Stark, an executive member of the European Central Bank, that the Euro's current strength reflects strong economic growth. It remains within a range seen before the launch of the Euro as a convertible currency in 1999, he said.

Today's fresh slump in the Dollar followed a long, dry speech by Ben Bernanke, chairman of the US Federal Reserve, last night.

Rather than addressing the fact that 18 of the world's top 20 central banks are now presiding over double-digit growth in their money supply – and making no mention of the collapse in subprime mortgage-backed assets, Dr.Bernanke spoke about anchoring "inflation expectations". He also noted how his predecessor, Paul Volcker, restrained the US public's long-term inflation expectations – in turn tempering the actual rate of inflation by curbing wage demands and speculation – by raising the Fed's rate of interest.

With bond yields now falling as energy prices increase yet again, might "strong medicine" be required? To get the facts now, click here and read on...

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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