Gold News

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...

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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