Gold News

Gold Prices Sit Tight Ahead of Fed Rate-Cut; World Equities Slide, Crude Oil Moves Higher

Gold Prices moved inside a $5 range early Wednesday, bouncing 1.3% below yesterday's new record high before recording an AM Fix in London of $923.75 per ounce as the world's stock markets fell in quiet trade.

"All eyes today are on the upcoming US rate decision," said Mitsui in Sydney, even before the Commerce Dept. reported a near-stalling in GDP growth for the end of 2007. "It's widely expected to lower rates again to support the aggressive 75-basis point emergency cut last week.

"There is a 75% chance of a 50 basis point cut already priced into the market, and anything but this amount would now be a surprise."

Shanghai's stock market fell 0.9% this morning to a six-month low as heavy snow brought much of China to a standstill. Aluminum prices jumped the most in 16 years as power cuts caused by the storms knocked out a quarter of Chinese output.

Crude oil rose for the fifth session running – its best run since Oct., according to Bloomberg data – ahead of today's US Federal Reserve announcement at 14:15 EST. But the promise of cheaper money to come failed to stop the broad MSCI Asia-Pacific index losing 1.2% for the day.

Japanese gold futures in Tokyo gave back 0.2% of yesterday's 24-year record vs. the Yen to equal $926.59 per ounce.

"There has been some talk about restarting gold mines in South Africa," said Dan Smith at Standard Chartered to Reuters today after Eskom – the state-owned utility – agreed to raise the proportion of power supplied to gold miners working in the world's second-largest producer nation from 70% to 90% following last week's shutdown.

"But the Fed meeting is going to be critical. The previous 75-basis point cut gave the impression that the Fed is panicking, which encouraged a lot of interest in gold as a safe-haven.

"If the Fed is seen overdoing and panicking, then it's likely to push gold up again."

Home prices in the ten largest US cities fell by a record 8.4% in the year to November according to the Standard & Poor's index released on Tuesday. The Federal Bureau of Investigation (FBI) is now investigating 14 companies for accounting fraud and insider trading related to subprime mortgage-backed bonds.

Twenty-six firms are already being sued by the New York authorities and their pension funds after underwriting home-loan securities issued by Countrywide Financial, America's largest mortgage lender.

And today UBS – the world's largest wealth management group – admitted an extra $4 billion in new write-downs, taking the Swiss bank's total subprime-related losses so far to $18.4bn.

"One could become very emotional about UBS," smirk analysts at J.P.Morgan in a note – "continuously behind the curve in write-downs and hence always topping-up; exposure disclosure is poor to new write-downs; and management leadership [is a] vacuum."

Shares in UBS have now dropped by 40% on the Zurich stock market. J.P.Morgan itself reported a 34% fall in fourth-quarter profits after writing down $1.3bn of its subprime investments.

"Until recently," writes Bill Gross, head of Pimco – the world's largest bond-fund manager – in his February Outlook, "US and therefore global demand has been driven by the ability to lower interest rates and extend credit to an increasing majority of Americans.

"[The trend] was bolstered and supported by innovative, securitized finance which in turn was nurtured by lax regulation and a belief that things could not go wrong.

"Now government spending needs to fill the gap," says Bail 'Em Out Bill – "not consumption. Writing [tax rebate] checks for American consumers which then flow to foreign central banks [via the trade deficit] is not the permanent solution."

Meantime on the currency markets this morning, the Euro hit a 10-session high vs. the Dollar above $1.4815, while the British Pound – ignoring news that new UK mortgage approvals fell to a 13-year low in Dec. – rose to a new five-week high of $1.9940 after Mervyn King, Bank of England governor, was re-appointed for a second five-year team.

"Incompetence really does pay when no one else wants your job," notes the anonymous hedge-fund manager behind Fintag.com. Today's UK money-supply data also showed bank lending to stock-brokers, hedge funds and other finance companies leaping by more than one-quarter in the year to last month.

The Gold Price in Sterling held below £464.50 per ounce regardless, while French, German and Italian investors wanting to Buy Gold today saw the price drop 1.2% from Tuesday's new record high to near €622.

"Although fresh central-bank gold sales from Portugal and Belgium are possible in 2008," says today's Official Sector Gold Activity report from GFMS on behalf of SocGen, "their combined volume would probably be limited and insufficient to prevent a significant shortfall from the 500-tonne CBGA limit."

Western Europe's central banks agreed in 1999 to limit their annual sales of Gold Bullion, and only just under-shot that target in the year-to-Oct., led by 240 tonnes sold by the Banco de Espana.

"Spain was left with a little more than 280 tonnes at end-Dec.," the GFMS report goes on, noting that last year's record gold sales "created quite a lot of controversy in the country, particularly in the light of subsequent increases in Euro gold prices."

On the other side of the ledger, winks the report's author – most likely referring to China, Russia and the Middle Eastern authorities – "gold purchases that take place [in 2008] will probably come from certain central banks seeking to diversify away from the US Dollar, be that due to the latter currency’s bleak outlook or to political motivations.

"It should be noted here though, that as gold remains close to all-time highs some of the potential buyers could decide to postpone purchases until a correction has taken place."

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Adrian Ash

Adrian Ash, BullionVault Gold News

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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