Gold hits 1-month high as $12bn in mortgage-backed bonds face credit downgrade

The price of gold jumped at the US open on Tuesday, hitting $661.70 per ounce by the Afternoon Fix and then peaking above $665 per ounce as London closed, the highest price in four and a half weeks.

For non-US investors, however, the gold market was little changed, since the $5 move from the overnight low came solely on Dollar weakness in response to the growing threat of a serious crisis in the subprime mortgage-bond sector.

Standard & Poor's, the leading credit ratings agency, announced at the Wall Street open that it may be about to downgrade $12 billion of US subprime mortgage-backed bonds.

The US Dollar sank to a fresh record low against the Euro, which traded above $1.3720. The Pound Sterling broke a new quarter-century high above $2.0245. That capped the Sterling price of gold below £328 per ounce.

"We expect that the US housing market, especially the subprime sector, will continue to decline before it improves, and home prices will continue to come under stress," said S&P as it put 612 pieces of residential mortgage-backed securities on "credit watch" this morning. The bonds represent 2.1% of $565.3 billion in bonds similarly rated by S&P, according to Bloomberg

"We do not foresee the poor performance abating," S&P went on. "Loss rates, which are being fueled by shifting patterns in loss behavior and further evidence of lower underwriting standards and misrepresentations in the mortgage market, remain in excess of historical precedents and our initial assumptions."

Most of the securities now under review at S&P are rated BBB, but some have been stamped AA – the magic "investment grade" rating that has allowed large institutional funds to invest in these higher-risk, higher-yielding assets.

For a full report in how the subprime mortgage sector leached into Wall Street's financial balancesheet, click here now...