Gold Rises & Stock-Rally Fades as Global Trade Slumps; Gold Mining Supply Falls as India's Diwali Demand Rises 50% from 2007
Gold Prices leapt to a one-week high of $765 an ounce going into Wednesday's New York opening, gaining 12% from Friday's 13-month low as the strong rally in world stock markets faltered ahead of today's Federal Reserve decision.
Widely expected to deliver a further 0.5% cut to US interest rates, the Fed's announcement at 14:15 EST could take the returns paid to Dollars back to the 6-decade lows now blamed for the sub-prime housing bubble of 2001-2007.
Today the People's Bank of China cut its target interest rate for the third time in six weeks. Further cuts are now expected from the European Central Bank (ECB) and Bank of England.
Even the Bank of Japan – already paying just 0.5% per year in a bid to reverse the deflation in asset-prices and wages that has mauled the world's second-largest economy since its own real-estate bubble burst 19 years ago next month. (Is The US Now Turning Japanese...?)
"If interest rates are low, money is very cheap and it's very easy to create an inflation bubble," said Liran Kapeluto of trading-system firm Fintoec in London to Bloomberg earlier.
"[Now] is a buying opportunity for gold. The selling pressure on the Dollar is high."
Crude oil also jumped today, adding 6% to $66.50 per barrel while food-stuffs and base metals also shot up.
That took the Reuters-CRB index of the most heavily-traded raw materials more than 1.5% higher from Tuesday's near-4 year low.
The US Dollar meantime held steady on the currency markets after falling Tuesday for the first time in four sessions, allowing non-US currencies to weaken in bullion terms, too.
It also showed that this morning's 2% jump in Gold Prices came from strong buying in the professional market, with gold vs. Euros touching €600 an ounce for only the third time in the last two weeks.
(See the shape of Gold Priced in the Top 10 World Currencies here...)
Over on the world's equity markets, in contrast, an early 7% gain in Tokyo failed to buoy the rest of Asia. Germany's Dax index fell 1.5% even as London's FTSE100 added 200 points to a three-session high.
"It's like standing on a beach watching a tsunami, knowing that it's coming," says Scott Stevenson, head of the World Bank's private lending division, of the shutdown in global trade credit.
The Baltic Dry Index – which measures shipping costs worldwide – fell Tuesday below the 1,000 mark for the first time since 2002. It's now lost almost nine-tenths so far this year.
"We only see this kind of shock when we have outbreaks of war, or maybe the oil shocks of the 1970s," warns Kjetil Sjuve, commodities shipbroker at Lorentzen & Stemoco in Oslo, Norway.
"This lack of credit was a shock to the entire economy. We were hit second after the banks."
Here in the UK, non-financial businesses cut their borrowing by £2.3 billion ($3.7bn) in Sept., the Bank of England said today.
Stock brokers and other non-bank financial companies grew their debts by £37.4bn ($60bn), however – a record 35% change from this time last year.
London's Accountancy Age magazine now says "mining finance is on the rocks" due to the global shutdown in lending to non-financial business.
"For some early stage companies there could be severe consequences, with projects put on hold or companies entering administration."
But while the credit drought, plus a surge in mining costs, is crimping Gold Mining stock profits – led by the 50% drop in third-quarter earnings reported Wednesday by US giant Newmont Mining – demand for the metal continues to grow.
"Diwali commenced on a cheerful note," reports the Press Trust of India today, referring to Tuesday's start to the Hindu festival of lights. Indian Gold Sales had already jumped more than 50% year-on-year on Sunday, adds the Business Standard in Mumbai, "due to the overwhelming response from buyers on the auspicious occasion of Dhanteras – a day in the Hindu calendar which ushers in the festival of lights, celebrated with the purchase of precious metals as a form of good luck."
One analyst estimates Sunday's gold sales at 90 tonnes, sharply higher from 2007's Dhabteras sales of 60 tonnes.
"India has witnessed a spurt in demand for gold not only because of tradition but also because it is now considered an attractive investment option," says Sumanth Kathpalia, head of the consumer banking at IndusInd, speaking to the Hindu Business Line.
"People have come to realise that in the present situation there is not much money to be made in the stock markets," agrees According to V.Krishnaswamy, head of the Indian Overseas Bank.
"So gold buying, both for investment and consumption purposes, has seen a significant rise."
Gold Fields of South Africa, in contrast – the world's fourth-largest Gold Mining stock – today reported an 8% drop in June-to-Sept. production from its global operations.
Safety work at the long-running South Deep, Driefontein and Kloof in South Africa – formerly the world's No.1 gold-mining nation – cut output in Gold Fields' home country by 11% from the same period last year.