Gold Dips Ahead of "Wealth Transfering" Rate Cut from the Fed; Asian & Mid-East Funds Pump $19bn into Western Banks
Gold Prices slipped back from an overnight high of $810.50 in early
London trade, recording an AM Fix of $806.75 per ounce as real-estate
stocks pulled European equities lower and oil prices dipped ahead of
today's decision on US interest rates from the Federal Reserve.
Germany's ZEW index of economic confidence fell sharply in Nov., the
research group said today. Inflation in China was reported at an
11-year high of 6.9%. Bomb attacks in Algiers killed at least 47
people, the second attack on a North African member of Opec since April.
"We see the year-end pressures on global liquidity as having potential
to force more money into gold," said Investec Australia in a report
this morning, "and foresee the recent move as the start of a $20 or $30
move higher over the next couple of weeks."
But looking at the latest data on Gold Market futures, ScotiaMocatta disagrees.
"The market volatility seen in recent weeks is no doubt adding to
overall risk reduction in the market," says the bullion bank's report
today, pointing to last week's 7% drop in the long positions held by
"The shorts also pared back their holding," ScotiaMocatta goes on,
"decreasing them by 7,700 contracts to 15,000 contracts in total."
Overall, however, the futures & options market in gold "remains at
lofty levels," says Mitsui, the precious metals group, in its analysis.
"It is unlikely that more money will be put on the table before
The sharp fall in Germany's ZEW confidence index – down to a reading of
minus 37.2 vs. analyst forecasts of minus 35 – wiped out all of
Monday's gains in the European single currency.
By 11:30 GMT the Euro was trading at $1.4690, helping to hold the Gold Price in Euros just above €549 per ounce.
The British Pound, in contrast, recovered $2.0500 for the first time in
a week on news that the UK's trade deficit shrank slightly in Oct.,
reaching £4.1 billion ($8.4bn) from Sept.'s £4.6bn deficit.
That accentuated the dip in bullion prices for British investors
wanting to Buy Gold Today, taking it below the overnight floor at £394
"The Dollar is a major factor," says Frederic Panizzutti, analyst at
MKS Finance in Geneva. "The expectation [of today's US Fed] rate
decision is resulting in some positioning in the Dollar and in gold,
which is affecting both the markets – the Dollar in a negative way and
gold in a positive way."
But with the Federal Reserve set to cut at least 25 basis points off
the cost of borrowing Dollars when it speaks at 19:15 GMT today, "lower
interest rates may actually be making the economic problem worse,
transferring all our wealth to unpleasant oil producing regimes," notes
Martin Hutchinson for PrudentBear.com.
Last month Citigroup sold a $7.5 billion stake in its business to the
Abu Dhabi Investment Authority. Yesterday, UBS of Switzerland – the
world's largest wealth management group – sold a 9% stake in its
business to Singapore's government-owned wealth fund, plus a near-2%
stake to a Middle Eastern investor, after admitting to a $10 billion
write-down on its own credit-related investments.
Since the start of Oct. alone, says research from Morgan Stanley, banks
and government wealth funds from Asia and the Middle East have now
invested $18.9 billion into Western finance companies. "It is a further
sign of how the balance of the world economy is changing," Gerard
Lyons, chief economist at Standard Chartered in London, told the Wall Street Journal overnight.
"Also it is a reflection of the current fragile state of the financial
sector in the West. The liquidity and the capital are currently widely
available in other parts of the world."
Lacking Asian or petro-Dollars to support it, Société Générale followed
HSBC, Standard Chartered and Rabobank on Monday by stepping in to bail
out its own off-balance sheet investment fund, currently valued at $4.3
Citigroup, meantime, has managed to offload $15 billion of assets from
its "structured investment vehicles" (SIVs) without resorting to a
firesale, says the Financial Times.
But Standard & Poor's, the global ratings agency, has now put 18 of
these SIVs on "negative" watch, warning that "capital investors in
these vehicles [may] see actual losses materialize.
"The SIV as a type of vehicle is unlikely to persist and thus we
formally assigned negative outlooks due to the issues in this sector,"
the agency added.
Between them, the major credit ratings agencies have now issued more
than 20,000 downgrades since the summer, led by US subprime-backed
Meantime in the Far East – where US Treasury secretary Henry Paulson is
visiting Beijing this week – "China needs to be looking to
opportunities provided by the weakening US Dollar," says Ha Jaming,
chief economist at China International Capital, the country's largest
"The government is becoming more interested in channeling money out of
the country," he added in an interview last week, after the Beijing
authorities issued 20 licenses to Chinese companies wanting to buy
Ha Jaming also said that the Chinese government's own sovereign wealth
fund – the $200bn China Investment Corp. – will be a "stabilizing force
in investment markets."
But while Asian and Middle Eastern wealth funds are now working to
support US and European investment banks, "the Dollar is losing its
status as the world currency," warned Chinese central bank director Xu
Jian at the start of last month.
"We will favor stronger currencies over weaker ones, and will readjust
accordingly," added Cheng Siwei, vice chairman of China's National
People's Congress, when he signaled plans to diversify Beijing's $1.43
trillion of foreign exchange reserves.
China's booming economy, meantime, has led to a surge in Gold Buying by
private consumers and investors, according to data from the GFMS
Demand for gold jewelry is set to rise by one-fifth for 2007 as a
whole, said executive chairman Philip Klapwijk last week, "overtaking
the United States and coming in No.2 behind India."
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