Spot gold prices whipped in a $5 range in the second-half of London trade on Wednesday, closing the session little changed from Tuesday's sell-off but above the day's low at $640.50 per ounce.
With the European bourses losing 0.5% for the day – and Wall Street also drifting lower – the PM Fix in London came in at $642.10 per ounce, a fresh 3-month low.
"We've seen this countless times," noted Robin Bhar at UBS to Reuters earlier. "When there is a whiff of risk aversion, the gold market like any other commodity tends to get affected by long liquidation and that's what we're seeing." (Isn't gold the perfect safe haven? Find out here...)
"Yen is being purchased across the board [as] carry trades unwind," added Jonathan Barratt of Commodity Broking Services in Sydney to Bloomberg. "You buy Yen and you sell gold, that's why the market is under pressure."
Barratt also reckons that "important support" came at $642 per ounce – a level broken late on Tuesday. "This would imply if we get a daily close below $640, the gold market could head all the way back to $572."
In the debt market, however, investors are already betting on a return to the "easy money" that's helped gold double in value against the US Dollar since 2001. Two-year US Treasury yields fell yet again on Wednesday as investors bought bonds, hitting their lowest point in a month. Ten-year US bond yields slipped to 5.06% by lunchtime in New York. They'd earlier touched a three-week low of 5.02%.
"We remain fairly bearish on the outlook for the Dollar," said Daniel Hynes, a metals strategist at Merrill Lynch in London earlier, "so we expect that to be supportive of the gold price."
"The overall concern about rising interest rates, I think, has been overdone a little bit," he added. The Federal Reserve will announce US interest rates for the coming month at 14:15 EST Thursday. The bond market – along with Bloomberg's survey of professional economists – expects no change.
With the threat of inflation rising even as the subprime housing sector continues to slump, that could prove to be the Fed's decision for several months to come. (Why do US interest rates matter to gold? Find out here...)
Further out in the risk markets, the price of credit default swaps – a form of insurance for corporate bonds – rose for the sixth day in seven as institutions in both Europe and North America tried to hedge themselves against the risk of non-payment.
The CDX index of North American credit default swaps hit a 10-month high. The iTraxx index of fifty European CDS put in its fastest rise since mid-March.
Further along the risk spectrum yet again, Bear Stearns was reported today to have given its top mortgage-bond trader the task of protecting the investment bank's $1.6 billion bailout of its High-Grade Structured Credit Strategies hedge fund.
Bear Stearns, the fifth-largest US securities company, said Tuesday that it won't rescue the Leveraged High-Grade fund that's also facing collapse. To read more – and to get an understanding of the alphabet soup now sloshing around the world's money markets – click here now...