Gold Crashes 4%, Dow/Gold Ratio Bounces from 14-Year Low, as Credit Crisis Hits China
Gold Bullion prices twice bounced off this week's support at $830 an ounce early Thursday, before crashing down to $795 – a 4% drop – as New York opened to better-than-expected US economic data.
Inflation in consumer prices last month slipped from 5.4% in Aug. to 4.9% year-on-year. Stripping out "volatile" food and energy costs, however, so-called core CPI held at 2.5% as medical care and other services pushed higher.
The cost of food rose 6.0% from a year before.
Initial US jobless claims were lower than forecast, but continuing claims rose to 3.7 million.
Capacity utilization amongst US companies slid to 76.4%, its worst level since the 2001-2 recession, and Industrial Production shrank by 2.8% from August.
Flows of foreign investment cash remained negative, sucking out a further $400 million after Aug.'s $74.8bn loss.
"Gold's fared relatively better than other assets in the financial crisis," said Wallace Ng, head of metals for Fortis Bank in Asia, to Bloomberg today. "But with these price swings, some investors may prefer cash now."
Hurricane Omar strengthened to category 3 near to Venezuela's major offshore oil rigs on Thursday, but the price of crude still sank to a fresh 14-month low below $73 per barrel.
The US Dollar gave back half of Wednesday's sharp gains on the currency markets, while the RJ/CRB-Reuters Commodities Index sank almost 5% as platinum plunged towards fresh three-year lows.
The Gold Price in Euros sank almost 5% as the range-bound currency markets were left untouched by the new US data.
Treasury bond yields rose. The S&P index on Wall Street retreated fast from a 1% jump at the opening.
"The markets are selling off stocks because investors still think the steps by US authorities are not sufficient," claimed Japan's new prime minister, Taro Aso, to the Tokyo parliament this morning.
Fast-becoming the very worst one-month slump in history – and taking the Dow/Gold Ratio down to just 10 for the first time since 1995 – the Greater Crash today knocked a further 11% off the Tokyo Nikkei after the S&P on Wall Street ended Wednesday over 9% down.
"We may need to increase domestic demand further due to the impact of various factors," said a leading Chinese official on Hong Kong TV late Wednesday.
"The main risk to China's banks is rapid slowdown in the economic growth and the crystallization of the latent credit risks," reckons Ryan Tsang, head of China's corporate ratings at Standard & Poor's.
"Depositors might move a significant portion of their deposits to state-owned commercial banks and other banks that they consider as safe," he adds.
"That would put other Chinese banks that are facing tight liquidity in an even more difficult position."
China's gold jewelry consumers accounted for 10% of physical world demand last year. Now the vice-mayor of Shanghai says growth in the city's industrial output slowed to 6% in Sept. after averaging 11.5% annualized during the first nine months of the year.
"In the past, we would expect to see Gold Bullion move up when stock markets tumbled," one Hong Kong dealer told Reuters.
"But this is not the case anymore. Some of the financial institutions have to liquidate their long positions to cover losses."
Hedge funds in particular – a major source of leveraged Gold Price between 2002 and 2007 – are being forced to quit their positions as clients pull out. (Read about Gold: No Credit, No Leverage here...)
"Some of the [big investment] funds are not doing very well," the Hong Kong gold dealer went on.
"Technically, it's difficult to say where the market is heading but $850 and $860 are still good resistance levels."
Today in Brussels, political leaders from the European Union called for a new pan-global super regulator to oversee the world's 30 very largest financial institutions.
Gordon Brown, the discredited former UK chancellor and now prime minister, called it a "new Bretton Woods", referring to the post-WWII currency regime which collapsed thanks to excessive US credit and money creation two decades later.
Down to the right in Budapest, the Hungarian central bank secured a €5 billion loan from the European Central Bank (ECB) in Frankfurt after prime minister Ferenc Gyurcsany asked for emergency help.
Hungary's overseas debts – including both private and public borrowing – now stand above 93% of the country's annual economic output.
Shares in Swiss financial giant UBS meantime recovered from an early 10% plunge after the Bern government promised a CHF 6 billion injection ($5.3bn) in exchange for a 9.3% share of its stock.
The ailing bank also said it will dump $60 billion worth of toxic securities onto the Swiss National Bank. Its No.1 competitor, Credit Suisse, said it will raise CHF 10 billion ($8.8bn) from foreign investors including the petro-rich Qatari government.
In New York this morning, ex-investment bank Merrill Lynch – now a division of Bank of America – reported a third quarter loss of $5.1 billion.
Citigroup, the Western world's largest bank, announced a net loss of $2.8bn for its fourth quarterly loss on the run.
New data from TrimTabs Investment Research showed wealthy investors pulling more than $43 billion out of US hedge funds during Sept.
"Every commodity is falling. I think it's much better to keep more cash on hand. The market is so uncertain," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, to Reuters earlier.