Gold News

Gold ends London near 6-week high as stock markets sink on woeful US data

Spot Gold Prices ended London trade on Wednesday above $682 per ounce – unchanged from Tuesday's 6-week high and equal to fresh 16-week highs in both Euros and Sterling – as world stock markets sank on disastrous US housing data.

Just after the Wall Street open, the National Association of Realtors said that the number of US homes pending sale in July sank by more than 12% from a month earlier. (With the Federal Reserve now curbing new lending to the subprime sector, is this any surprise? For the full story, click here...)

The Dow Jones index dropped over 100 points in the first hour of trade, and the FTSE100 index in London ended the day more than 1.6% lower.

The ADP Employment report for Aug. had earlier shown an increase of just 38,000 against analysts' forecasts of 80,000 growth, while the Organization for Economic Co-Operation & Development (OECD) cut its GDP forecast for the G7 group of leading economies.

"Downside risks have become more ominous in a context where overall
financial market conditions are likely to remain durably tighter," said
the OECD in its report, pointing to "serious imperfections" in the US housing market and credit markets worldwide.

"The Gold Market has finally changed its view," said one precious metals dealer in Europe to Reuters. "The short-term outlook is rather higher, as sentiment has turned bullish. People want to buy dips."

Ahead of tomorrow's interest-rate decisions in Europe, both the Bank of England and its counterpart in Frankfurt, the European Central Bank, failed to reassure the credit markets despite moving to ease the ongoing liquidity crunch.

In London, the Bank of England today increased the cash reserves it makes available for short-term borrowing, after overnight lending rates charged by commercial banks hit their highest level since 1998 at the start of this week.

The gap between interbank lending rates and the central bank's target rate has shot to a two-decade high, and late last month, the UK's third-largest bank – Barclays Plc – had to borrow emergency funds twice from the Bank of England after failing to raise funds in the marketplace.

"The Bank of England’s move [today] was quite surprising," says Chiara Corsa, an economist at UniCredit, "because so far they have shown a very tough attitude toward the problems in the market, and had not intervened at all."

Over in Frankfurt, the European Central Bank said it was "closely monitoring" the flow of interbank lending after overnight Euro interest rates neared 4.69%, almost the same high that preceded the central bank's unprecedented injection of €94.8 billion into the money markets on Aug. 9th.

"Should this [problem] persist tomorrow, the ECB stands ready to contribute to orderly conditions in the Euro money market," the Bank said in its statement – finally quashing any chance that it may its target lending rate at Thursday's meeting, despite signaling a hike in mid-Aug.

Meantime in New York, ten-year US Treasury yields fell to a fresh 5-month low of 4.48% as investors piled in Washington's debt. "What we have here is an economy slowing," says Tom di Galoma, head of Treasuries at Jefferies & Co. in New York.

Noting that two-year US bond yields fell 11 points in early US trade today to hit 4.02% by the London close, "I would not be surprised if at some point this week two-year [bond yields] drop under 4%," he added.

The sharp drop in the US Dollar caused by today's woeful data failed to dent gains for Eurozone and British investors holding gold. By the close in London, the world's premier Gold Trading Market, the price of gold in Euros stood above €502 per ounce, its highest level since the first week of May.

Gold Priced in British Pounds ended the session above £339.50, also a 16-week high and a 2.5% gain from Wednesday last week.

"If an investor is betting on the Fed’s ability to reignite the asset bubble with extremely expansionary monetary measures," says Dr.Marc Faber in his latest Gloom, Boom, Doom Report, "then gold is likely to continue to outperform the major US stock indexes, as it has done since 2000."

Indeed, Dr.Faber cites the doubling of Dollar-Gold Prices between 2001 and 2005 as the "first warning" that "ultra-expansionary US monetary policies with artificially low interest rates [would] lead to bubbles all over the world and in every imaginable asset class."

Now those bubbles may all be bursting in sync, threatening a genuine crisis in the global financial markets. Gold, on the other hand, remains well-bid today – not least with the wedding and festive season now gathering pace in India, the world's hungriest market for physical gold.

If you'd like to secure a portion of Solid Gold Bullion – held outright, in your name, with no credit or default risk – be sure to consider the option of owning market-approved Good Delivery Gold in Zurich today.

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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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