Gold rose steadily in the first-half of London trade on Tuesday, holding 0.6% above Monday's low of $912.50 per ounce as crude oil rose to a new record high and government bond prices fell sharply, pushing longer-term interest rates higher.
Mining and oil stocks rose in Europe, but banking shares fell after a private-sector rescue of a leading "pfandbrief" lender to Germany's federal-state governments.
Here in London, Royal Bank of Scotland announced Europe's biggest-ever rights issue in a bid to repair its balance sheet.
Looking to raise £12 billion ($24bn), RBS will offer stock at a 46% discount to Monday's closing price.
"Worse-than-expected financial results at Bank of America [on Monday] reignited US credit market crisis concerns," note Walter de Wet and Manqoba Madinane in their Gold Market report for Standard Bank today.
"[But] this failed to drive precious metal alternative investment demand, indicating that investors are possibly preferring to hold cash."
Supporting this view, they point to Monday's drop in US bond prices, even as global equity markets fell.
"The US economy is still weak, and indirectly that's positive for gold," counters Bernard Sin, head of Gold Trading in Geneva for MKS Finance, the precious metals refiner.
Tuesday's early gains, he believes, showed "people are pre-empting next week's Fed meeting" – widely expected to deliver another 0.25% cut to the cost of Dollars.
In Europe, in contrast, Christopher Noyer today became the fourth ECB policy-maker in two days to hint that the European Central Bank will soon raise its key lending rate to tackle inflation.
Last month saw the cost of living in the 15-nation Eurozone rise at its fastest pace since 1992. Growth in the European money supply – formally a key target for ECB policy – is running at a three-decade record.
"We'll do what it takes [to] make sure inflation falls back below 2% next year," Noyer claimed on RTL radio in Luxembourg today, and his comments sparked a fresh surge in the Euro, pushing it back towards last week's new all-time high above $1.5960 against the Dollar.
Crude oil meantime rose above $118 as Royal Dutch Shell confirmed the loss of 160,000 barrels in daily supply after militant attacks in Nigeria, the world's eleventh-largest producer.
"Despite the strong oil price and Euro [however] – the two main factors that have been driving the recent price moves – Gold has failed to consolidate any recent gains," says today's note from Mitsui, the precious metals dealer.
"The outlook for precious metals is the least bullish it has been for some weeks."
Noyer's comments also sparked what one analyst called a "massive unwinding" in European government-bond portfolios today, pushing longer-term interest rates higher.
Four-year German bund yields today rose above 4.0% – the ECB's current overnight target – for the first time since November. Two-year UK gilt yields were pushed 13 basis-points higher to 4.47%.
This sell-off also added to the pressure on US Treasury bonds, already dented by Wednesday's looming auction of $30 billion in new two-year notes.
The yield offered by two-year Treasuries jumped this morning to a 3-month high of 2.21%, picking up from March's 30-year record low after accounting for inflation of minus 2.70%.
Hunting around to beat the upturn in open-market interest rates, the Royal Bank of Canada today said it has sold US$300 million in three-year bonds to Japanese investors, paying a yield of just 1.77%.
These new "samurai bonds" – priced some 0.7% above the inter-bank lending rate for Japanese Yen – will cost RBC less than half what it would pay to domestic Canadian savers.
Meantime in Germany, the Düsseldorfer Hypothekenbank – a family-owned German bank that lends to the national and federal governments – became the third Düsseldorf bank last night to need rescuing since the global credit crunch began in August.
In common with 33 other German banks, the Düsseldorfer Hypo raises funds by selling "pfandbrief" – a form of collateralized bank debt. The private-sector Association of German Banks (BdB) has now stepped in to take control of its assets.
First issued in 1769, pfandbrief make up 44% of the total world market in covered bonds according to the German Association of Pfandbrief Banks (VPD).
Holding just 0.5% of its assets in mortgage-debt outside Germany, the Düsseldorfer Hypo grew its total assets by 36% between 2005 and 2006 to post net profit of €22 million.
Last year's profit fell to €100,000. The Schuppli family injected €100 million into the bank in February.
"We don't have any liquidity problems and our operations are still trading in the black," claimed Wolfgang Hampel, a managing director at the bank, speaking to the FT Deutschland today.
But the rescue "is pretty dramatic" says an analyst at Landsbanki Kepler in Frankfurt.
"German banks still have the advantage that they can raise money with Pfandbriefs. So it's a necessary step to stabilize the lender and protect the Pfandbrief market."
Researching your first Gold Investment today? Don't pay more than you should! Make it cheap, simple & ultra-secure at BullionVault...