Gold News

Gold Drops 2.1% as Global Equity Losses Reach $5 Trillion; "Panic-Driven" Dash for Cash Supports Dollar & Yen

Gold Prices bounced off a 2.1% drop at the London opening on Tuesday as global stock markets finally steadied after continuing Monday's plunge.

The loss of world equity value for 2008 to date is now put above $5 trillion. Investors looking to Buy Gold today found it trading just 5% off last week's all-time record this morning in London.

"Everything is down, not just gold," noted Ronald Leung of Lee Cheong Gold Dealers in Hong Kong to Bloomberg earlier.

"We still see some support at the $845-$850 level from short-covering and dip-buying, and I think gold is still in a long-term bull trend."

Government bonds continued to rise alongside the US Dollar and Japanese Yen this morning in what one broker called a "pure panic-driven flight to safety." The dash for cash pushed the yield on two-year US Treasuries down to 2.06% – a four-year low – as the Gold Market bounced off $850 per ounce and Japanese stocks closed out their worst session in more than 10 years.

The British Pound hit an 18-month low vs. the Yen beneath ¥205.00, and the Euro fell to a one-month low on the currency markets beneath $1.4370.

Hong Kong stocks dropped 8.7% of their value to stand fully one-fifth lower since New Year's Day. The India Sensex sank 10% at the opening in Mumbai.

"There is no reason at all to allow the worries of the Western world to overwhelm us," said Indian finance minister P. Chidambaram earlier today. The European Union's economic & monetary affairs commissioner says that "at least in Europe the fundamentals of our economies are sound."

The UK chancellor told the BBC last night that the British economy remains "sound [and] robust" thanks to low inflation (now rising at a 10-year record) and strong employment (11.3% of adults wanting a job are now without work).

Meantime in Germany, it was Monday's announcement from WestLB in North Rhine-Westphalia – the country's strongest state economically – that it would post a loss of €1 billion for 2007 which helped push the blue-chip Dax more than 7.1% lower for the day.

"[Yet] just a few months ago," as Deutsche Welle reports this morning, "WestLB issued a statement assuring investors that its exposure to subprime securities in the United States was 'relatively limited'."

All eyes are now on the Wall Street open after US markets were closed for a national holiday on Monday. Dow futures quoted in London today put the industrial index more than 590 points lower from Friday's close.

Most urgently, traders will want to review the price of the big "monoline" insurers, those firms which insure the value of bonds held by pension, investment and hedge funds.

Between them, the monolines now stand behind $2,400 billion of corporate, municipal and asset-backed securities worldwide. And on Friday, a major monoline insurer – Ambac – saw its own credit-rating downgraded from "triple A" to "double A" after scrapping a plan to issue $1 billion in new shares to defend its balance sheet.

Down by 92% in the last six months, Ambac's stock lost only four cents on the news, but the fear today is that the credit rating agencies will downgrade its competitors – and without that critical "triple A" rating, they'll be unable to raise funds and guarantee payment on the bonds they have already insured.

In Frankfurt this morning the cost of insuring against bond-default by European companies shot to new record highs, with credit default swaps on investment-grade debt rising 8% in price.

High-yield bonds became 6.4% more expensive to insure using CDS.

Meantime in the commodities market, US crude oil today dropped nearly 3% to hit a six-week low of $84.64 per barrel. Brent crude traded in London for March delivery fell $2.50 to $85 per barrel.

Corn, copper and zinc all fell "limit down" at the Shanghai Futures Exchange, and palm oil futures in Malaysia suffered their worst one-day drop in seven months after the Beijing government said it will release key supplies from China's food stockpiles ahead of next month's Lunar New Year celebrations.

The cost of living rose by 6.9% in Nov., an 11-year record. Now state officials are "closely watching the supplies and prices of basic living necessities."

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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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