Investors wanting to buy gold at spot prices on Tuesday found the metal trading at its lowest price since mid-March by the London close.
Down more than $10 for the day, spot gold prices lost more than 1.5% of their value, matching a plunge in silver prices which began just before the sell-off in gold bullion.
Newswires and analysts pointed to rising US bond yields for the move after a mixed report on the US housing market. European equities ended the end slightly lower, while Wall Street and the major currencies were flat despite an earlier bounce in the Japanese Yen.
The Federal Reserve will announce US interest rates for the coming month on Thursday. According to the US bond market, the central bank will remain on "hold" for the 12th month running at 5.25%. Gold most often gains when global interest rates – led by the US – fail to rise ahead of inflation. (Read more here...)
Overnight in Tokyo, the gold market had seen futures contracts for April '08 slipped 1% against a rising Yen, closing at the equivalent of $656.46 per ounce. The Japanese currency rose from a four-and-a-half year high vs. the Dollar – and bounced from a near-all time low vs. the Euro – following a warning from Koji Omi, the Japanese finance minister.
"As I have repeated, Japan is carefully watching foreign-exchange rates," Omi warned a news conference earlier. "The fundamentals of the Japanese economy are solid. Disorderly moves of foreign exchange rates are undesirable."
But Omi-san's brave words jar with Tokyo's monetary policy, however. The BoJ continues to lend money at 0.5% or below – the lowest rates in the world. Japanese government bond yields slipped back this morning, taking the benchmark 10-year yield to 1.875%, down from a one-year high of 1.985% hit two weeks ago.
US bond yields also fell as prices rose early Tuesday, after the National Association of Realtors said yesterday that the US housing market continues "to underperform".
Turnover in the market for existing US homes slipped 0.3% last month from April, recording a 10.3% drop from May '06. Prices achieved also fell after home-owners had refused to discount in April. The median sale price across the US in May was 2.6% lower from a year earlier. Data for new-home sales on Tuesday showed further falls in asking prices.
"The US housing market is weak and will be a drag on the US economy," reckons Hiroki Shimazu, a fixed-income economist at Mizuho Securities in Tokyo. The two-year bond yield dropped to 4.88% as London opened, suggesting lower US interest rates ahead. Jens Lauschke, a strategist at Singapore's largest bank, DBS Group, now reckons the US Fed will cut its interest rates to 4.5% by the end of this year.
Back in Tokyo the Nikkei closed flat on Tuesday, repeating the sideways action seen in New York and Europe yesterday. London's largest hedge fund, GLG, saw its stock rise 7% on its first day of trading on Wall Street. Queen's Walk, a London-listed hedge fund specializing in subprime US mortgage debt, announced that it has cut its leverage from 25 times to below seven. (Read more about the trouble in subprime mortgage-backed hedge funds here...)
"Spot gold prices have been undermined by the Euro's failed attempt to near $1.35 on the currency market," reckons one Tokyo researcher. But "as long as the Bank of Japan continues to tighten policy at a very slow and gradual pace, it seems likely that investors will continue to use the Yen as funding for their carry trades," as Standard Chartered Bank noted in a report yesterday.
To date, gold has attracted strong flows from Japanese citizens looking to defend themselves against the collapsing value of their currency.
Standard Chartered now predicts the Bank of Japan will wait until Dec. before raising its rates to 0.75%. ABN Amro forecasts the Yen will drop a further 2% vs. the Dollar by the end of this summer. Citigroup, the world's third-largest currency trading firm, reckons the Yen will fall to ¥125 per Dollar by that time.
Why are the Japanese authorities intent on destroying the Japanese Yen with ultra-low interest rates – and what might it mean for gold? Read more here now...