Gold News

Gold hits 5-month low for European buyers as Yen rises, CDO collapse looms

The spot gold market continued to hold above $641 in the first-half of London trade on Wednesday. But after Tuesday's $10 sell-off, "gold hits 3-month low as investors flee risk," reports Reuters.

Today's AM Fix came in at $642.85 per ounce – the lowest gold price in Dollars since March 5th. For British investors wanting to buy gold today, the gold price in Pounds Sterling on Wednesday dipped below £322 per ounce. French and German investors found the Euro price of gold trading below €478.50 – also a 5-month low.

Why the sudden plunge in gold prices this week? Gold the "safe haven" asset has now sunk three times as the Japanese Yen has risen, losing out alongside a sell-off in stocks and the broader commodity markets.

It may be impossible to quantify, but the size of long-gold positions held by Japanese investors and institutions – able to borrow Yen at near-zero rates to fund speculative trades for more than a decade – is clearly hurting the gold price every time the Yen bounces.

Overnight the Japanese Yen pushed back the Dollar by 0.4%. It rose that much versus the Euro too, which had previously hit a fresh life-time high against the Japanese currency.

In Tokyo the Nikkei stock index dropped 1.2% today to record its lowest close in two weeks. The European bourses ticked lower Wednesday morning. Wall Street futures also pointed lower following a 2.4% drop in the Dow Jones US Home Construction Index on Tuesday.

That move came on data showing the price of new US homes dropping 2.1% year on year in May. The number of US home-buyers now late with one outstanding mortgage payment is at a 13-year high according to the Federal Deposit Insurance Corp.

Now defaults on subprime US mortgage loans will "grow and grow like a weed" according to Bill Gross, head of the world's largest bond fund, Pimco. His latest note to Pimco clients also warns about the looming collapse of the market in collateralized debt obligations (CDOs) – complex credit derivatives often issued against bonds backed in turn by residential mortgage loans.

Speaking of the credit-rating agencies that approved many CDOs are investment-grade debt, Gross writes: "AAA? You were wooed, Mr. Moody's and Mr. Poor's, by the makeup, those six-inch hooker heels and a 'tramp stamp'. Many of these good looking girls are not high-class assets worth 100 cents on the Dollar."

In the broader markets, copper also fell for the fourth session running today, while zinc futures traded in Shanghai dropped 4%. Rubber and palm oil both fell overnight, while platinum has now lost more than 2.1% from yesterday's opening. Silver prices, the first precious metal to begin dropping on Tuesday, have now lost nearly 6% from yesterday's London start.

"Behind the slump in the New York gold market [on Tuesday] is risk aversion," reckons Satoshi Matsunaga, analyst at Mitsui Bussan Futures in Tokyo. "Unwinding of Yen carry trades is going on."

Tokyo gold futures dropped 2% at the Tocom today. The world's biggest gold ETF, StreetTracks GLD, recorded net redemptions of 11 tonnes from the bullion it holds in trust for US investors since Monday.

"Gold has dropped down to its 200-day moving average which seems to be providing some support," says Phil Smith for Reuters India Market Technicals today. He puts the next level of support in the gold market around the March low of $632.30 per ounce.

If you'd like to buy gold bullion at today's 3-month Dollar discount, be sure to visit BullionVault for live spot prices and low dealing fees today.

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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