Gold News

Gold a "Safe Haven" Amid New Currency, Stock-Market Crisis; Prices Dented by Failing Hedge Funds & Forced Selling

Gold Prices sank and then bounced hard vs. the Dollar early Monday, whipping violently against all major currencies as world stock markets added to this year's 40% losses to date.

"While [the key Indian festival of] Diwali is one day away in India," notes Mitsui – the precious metals dealer in London – today, "it is important to note that physical demand is strong globally, and this may help to support the Gold market at these levels.

"Silver remains in a down trend, and the charts do not look positive."

The London Gold Fix was set this morning at $720.50 per ounce, more than 4% above Friday AM's thirteen-month low, as the International Monetary Fund (IMF) announced a $16 billion emergency loan to the Ukrainian government.

Western Europe now risks becoming "the second epicenter of the global financial crisis," says Stephen Jen at Morgan Stanley, because the region's banks hold three-quarters of the emerging world's $4.7 trillion in outstanding cross-border debts.

"Just as the Asian Currency Crisis in 1997 undermined Japanese banks which had large exposures to Asia," writes Jen, "so problems in Eastern Europe could have a negative feedback effect on European and Swedish banks."

Back in precious metals, meantime, the Gold Price in Euros today held above last week's close at €580 per ounce, while the single currency rallied from a new 30-month low beneath $1.2340.

For British investors and savers, the price of Gold Bullion leapt to an 8-session high as the Pound Sterling sank once again on the currency markets.

"We reaffirm our shared interest in a strong and stable international financial system," said a joint-statement published Sunday by leaders of the G7 economies. It hinted at co-ordinated intervention in the currency markets after "recent excessive volatility in the exchange rate of the Yen."

Since the global credit crunch first bit in August 2007, the Japanese currency has risen by more than one-third against the US Dollar – even as the greenback itself has turned sharply higher – reversing the previous 12 years of weakness.

(Read more about the Dollar-Yen Comeback here...)

The Yen has also gained nearly one-half vs. the Euro, and shot more than 75% higher against "commodity currencies" such as the Canadian and Australian Dollars as borrowed money – the so-called Yen Carry Trade – flees back to Japan amid what one analyst today called "panic selling".

Today the Gold Price in Yen fell back towards last week's two-year lows at ¥2,000 per gram, with Tetsuya Yoshii – head of derivative products at Mizuho in Tokyo – telling Bloomberg that "Gold is a safe haven, but right now people are just fleeing for cash."

Hong Kong shares today lost more than 12% of their value, while India's Sensex dropped to a fresh 3-year low – down almost 48% from its top of Jan. '08.

London and Frankfurt both lost another 4% in morning trade, while the Japanese stock market itself plunged through its bottom of March 2003 to close at a 26-year low of 7,162.

The Nikkei has now lost 60% of its value since hitting all-time record highs on a flood of cheap money and real-estate speculation two decades ago.

"People are just liquidating," said one Hong Kong fund manager to Reuters today. "Nobody can predict where the bottom is."

"The risk of forced selling as prices fall further is the essential challenge facing the market as it makes a bottom," agrees Stuart Schweitzer, global markets strategist at J.P.Morgan Private Bank, speaking to the Financial Times.

Speculation in Gold Futures and options continues to shrink as credit dries up and investors are forced to close even winning positions. According to the latest data, the total number of open contracts in US gold derivatives falling by more than 10% in the month to last Tuesday.

Since peaking in Jan. this year, open interest in Comex gold contracts has shrunk by 37%.

Hedge funds and other "large speculators" have more than halved their bullish betting on gold since mid-July, slashing it to the smallest size since Christmas 2006. Private individuals playing the gold derivatives market cut their bets by one-fourteenth, and they cut their bull-to-bear ratio from 63% to just 57% – a new four-year low.

"The fact that gold did not head higher during the current leg of the [global financial] crisis seems to reflect a combination of the rise in the US Dollar, de-leveraging of commodity positions, sales to meet margins calls on other assets and the unwinding of the long gold-short dollar trade by some investors," says the new Gold Investment Digest from marketing group the World Gold Council (WGC).

"The current crisis has seen much more pressure on gold as an 'asset of last resort', where Gold Has Been Sold to Meet Margin Calls, when there have simply been so few other viable options available.

"The unwinding of commodity positions has also had a more direct effect on gold, as the yellow metal is often bought as part of a commodity basket or broader commodity trade."

US crude oil prices fell on Monday below $62 per barrel – down by 60% from July's record high – despite the Opec oil cartel agreeing to cut its output quota by one-barrel-in-20 from next month.

The price of coal shipped to Asian power stations from Australian mines meantime slid below $100 per ton for the first time since March, while copper futures traded at the London Metal Exchange (LME) lost almost 7% to stand two-thirds below their record peak of May.

Soft commodity prices fell up to 2.5% in late Asian trade, with soy beans losing half their Dollar-value since June.

Bloomberg News says today that the cost of buying credit-default insurance against the corporate bonds of Glencore International – the world's largest commodity trader – has risen five times over since mid-August to reach 12.4%.

Chicago-based Citadel – the $20 billion hedge fund group – admitted on Friday that two of its main offerings have cost investors more than 35% of their money so far this year.

Co-manager of listed hedge fund GLG Partners, Emmanuel Roman, believes that between 25% and 30% of the world's 8,000 hedge funds will disappear "in a Darwinian process" amid the current financial meltdown.

GLG's own stock, floated on the NYSE in Mar. 2007, has shed four-fifths of its value since this time last year.

Across the world in the crucial physical Gold Bullion Market of India, meantime, tomorrow's Diwali "festival of lights" is expected to produce lower gold sales than 2007's record. But the recent drop in Rupee Gold Prices from early October's all-time highs is expected to encourage jewelry and small-bar investment, however.

"Sales for the Dhanteras festival were very high over the weekend" said a jewelry dealer in Ahmedabad to Reuters today. "Fluctuating Gold Prices are making customers cautious," said a jeweler to the Calcutta Telegraph. "Cautious but optimistic," is how another dealer described this autumn's outlook.

"Reduced demand has to much to do with the dramatic weakening of the Indian Rupee against the US Dollar," writes Wolfgang Wrzesniok-Rossbach at Heraeus, the global refining group based in Hanau, Germany.

"The Indian currency has lost 20% in the past eight weeks, making gold accordingly more expensive in the local currency.

"At the moment we see a medium-term downside risk [in Gold] to be in the range of 5-10%. On the other side, technical resistance is at $760 and then again only above $800 an ounce."

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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