Gold Prices Rally as Oil Bounces; Fresh Banking & Credit Fears Hit New York
The price of Gold recovered an overnight dip of 0.7% early in London on Friday, nearing the US open above $926 per ounce as crude oil bounced from yesterday's sharp sell-off.
The US Dollar held flat against the Euro after a surprise fall in the PMI index, which tracks the European economic outlook.
London's stock market slipped to a 2.5% loss for the week, pulled down by mining and energy stocks on what the newswires called "profit taking".
"Although we see further upside potential [in Gold], a further correction is likely today," believes Walter De Wet at Standard Bank in Johannesburg, "as investors consolidate their positions ahead of the weekend."
Both New York and London – center of the world's international Gold Market – will be closed Monday for public holidays.
"Gold's mini-crisis [after reaching $1,032 in mid-March] can be explained by the easing of a major crisis – the credit squeeze," says the latest Fortis Metals Monthly from Virtual Metals in London.
"We believe gold's surge from September was different from the gains it had made earlier in 2007 and other years, in that it was a panicked response by investors to fears of a meltdown in the financial system.
"Now the situation appears to be under control, gold has lost ground. [But] this does not mean it cannot head back towards $1,000 per oz unless the credit crisis again turns nasty. In fact it can – but for different reasons, and over a longer time-scale."
Credit and counterparty fears came to the fore again in New York this week after David Einhorn, the hedge fund self-publicist running Greenlight Capital, repeated his accusation that Lehman Bros. – the fourth largest US investment bank – has actively misled investors over its true losses on credit derivatives.
"For the last several weeks, Lehman has been complaining about short-sellers," Einhorn added in his speech on Wednesday.
"Academic research and our experience indicate that when management teams do that, it is a sign they are attempting to distract investors from serious problems."
Lehman's stock lost almost 3% as news of Einhorn's analysis spread on Thursday. The Wall Street Journal then added pressure today on Moody's – the credit rating agency – by quoting a managing director who confirmed it switches analysts if "an analyst doesn't get the message" expected by the issuer of a particular debt investment.
Moody's stock has already lost 25% of its value so far this week after the Financial Times this week reported a computer glitch – dating to early 2007 – in the agency's "triple A" rating of $4 billion in complex debt derivatives.
New York senator Charles Schumer has since asked the US Securities & Exchange Commission to investigate.
But in the Gold Market today, however, "oil is the factor everyone is watching," reckons Narayan Gopalakrishnan, a trader at MKS Finance in Geneva speaking to Bloomberg.
"If oil drops today it could wipe about 10 dollars off the Gold Price."
US crude oil futures bounced 1.2% in London trade this morning, rising to $132.40 per barrel after sliding 3.7% from the new peak above $135 hit on Wednesday.
"The oil market's term structure [has] tipped into contango," notes Brad Zigler at HardAssetsInvestor.com, "ending a stint of backwardation stretching back to July 2007."
In plain English, long-dated oil futures now cost more than nearer-term contracts, with oil for delivery in Dec. 2016 priced above $136 per barrel.
"Depending upon who you talk to," says Zigler, "this [rare event] either means the market's building in permanent expectations of higher-priced oil or it's a signal that the current price run-up has been overextended."
Meantime on the data front, Friday brings Existing Home Sales data for April from the US. Transaction volumes are expected to show a 1.6% fall after Thursday's record 1.7% drop in all house prices reported for the first quarter.
The number of US workers on jobless benefit last week held at a four-year high, said the Dept. of Labor, "underscoring the economy's woes" according to Reuters.
Looking at the broad shift in financial and economic power to the Middle East and Asia, "for Gold, faster appreciation of the Yuan, Rouble and Gulf currencies would be quite positive," believes Martin Murenbeeld, head economist at Dundee Wealth Management in Toronto, Canada.
"A stronger currency would benefit Gold demand in each region, and add to the rising demand from ongoing increases in local wealth."
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