Gold News

Spot gold little changed as Sterling rates rise, Euro rates unchanged

Spot gold prices moved gently higher against the US Dollar in London on Thursday, adding $2 per ounce from the overnight start in Asia to break $656 just before the US open.

"People are reluctant to take new positions ahead of New York trade today after the Fourth of July holiday," reckoned Shuji Sugata at Mitsubishi Corp. Futures in Tokyo, to Bloomberg earlier.

"But the gold market remains bullish," he added, "supported by the falling Dollar and rising oil prices."

Brent crude oil traded in London rose above $73 per barrel this morning. US crude oil held near its own 10-month highs. The Dollar dropped 0.3% against the Japanese Yen.

After the Bank of England raised UK interest rates to a six-year high of 5.75%, the European Central Bank also did as the markets expected, holding Eurozone rates at 4.0%.

"People don't want to trade gold too heavily ahead of the US payroll data due Friday," said another Tokyo analyst to Reuters. "Gold will stay range-bound until we confirm the outcome of these events."

For Australian investors wanting to buy gold today, the metal held at A$765 per ounce, unchanged after the Reserve Bank of Australia chose not to raise its interest rates from their current 6.25% – the seventh month of "no change" in a row.

The Bank of England's move was widely expected, since "credit and broad money continue to grow rapidly," as the Bank admitted in its accompanying statement. That underplays the rate of credit expansion in the UK, however, where broad M4 has now grown at double-digits annually since spring 2005.

Eighteen of the world's top 20 central banks are in fact presiding over double-digit rates of annualized growth in their local money supply. Accounting for tax and inflation, however, this fifth "baby-step" inside 12 months from the Bank of England still leaves real interest rates at just 0.3% per annum for basic-rate UK taxpayers. Higher-rate savers are suffering negative real interest rates of 0.85% based on May's retail price index.

With today's rate decision already priced into the currency markets, the Pound Sterling pulled back from yesterday's fresh 26-year high against the Dollar to trade as low as $2.0120. That dip put the Sterling price of gold at £325.50 per ounce – some 0.4% higher from Wednesday's opening.

The Euro meantime rose above $1.3660 – its highest level against the Dollar since April 30th. That pulled the price of gold in Euros back to €480.60 from an earlier spike above €482 per ounce.

Even though few analysts had expected a surprise change from the ECB's 4.0% interest rate, Eurozone bond prices slipped in early trade, pushing the 10-year yield up to 4.62% in the bond market. US Treasury bonds also slipped in price, pushing the 10-year yield four points higher to 5.08% at the London opening. In the corporate debt markets, meantime, last month's move through the 5.0% barrier continues to rattle investors.

"There are some very scary analogies between high yield corporate bonds and the mortgage market," says Kevin Lorenz, a fund manager who runs $2.5 billion of high-yield assets at TIAA-CREF in New York, one of the world's largest bond funds. "You cannot do fundamental analysis and believe that those are creditworthy companies."

Twelve high-yield bond issues have now been pulled through lack of demand in the last week, according to Bloomberg data. Between Jan. and June, high-yield debt issues had risen by 70% to a record $1 trillion. "More securities than ever have the lowest credit rankings," says the newswire, "with CCC ratings assigned to 26.5% of the new debt."

In 2006, triple-C rating were assigned to just 15% of all corporate bond issues. That rating, says Fitch – the credit ratings agency – means the debt carries a "high default risk".

If leveraged investors can't borrow to fund their next buy-out, they can always try the equity market instead. Kohlberg Kravis Roberts & Co., the leveraged private equity firm which pulled a $1.55 billion bond issue last week, said Wednesday it plans to float as a listed stock, following the lead of its rival Blackstone Group.

KKR could be worth around $30 billion according to The Times of London. Blackstone's shares are already trading below the IPO price of two weeks ago.

For a full report on the risks posed by today's out-sized and over-geared debt markets, click here now...

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.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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