Spot Gold Drops to 1-Month Low as Government Cash Piles Up at Commercial Lenders; "Monetary Inflation" to Follow
Spot Gold bullion prices slid further on Friday, dipping to a new one-month low beneath $785 an ounce as inter-bank lending rates eased on an historic flood of government cash into commercial bank coffers.
"While the gold market has seen fresh investors allocate assets to what was perceived as safe haven investment," notes Mitsui in London, "many have been frustrated with the lack of performance by gold.
Coupled with "capital constraints" – meaning Forced Gold Sales by Hedge Funds and others needing to raise instant cash – has "led to liquidation," the precious metals dealer goes on, "pushing the gold market sub-$800.
"[But] the physical demand in both Gold and silver has been strong, and if prices remain at these levels expect this trend to continue."
US crude oil prices bounced back above $70 per barrel, but remained more than one-half below the peak of July.
Japanese equities bounced from their 25% slump so far this month, but the rest of Asia sold off again.
European stock markets posted a 2% gain Friday morning, but US stock futures pointed lower ahead of Sept.'s house-price data and a televised "pep talk" from President Bush.
US manufacturing growth has sunk to an 18-year low, with new orders at their worst level since 1980.
Overall industrial output just posted its biggest month-on-month slump in 34 years.
"Central banks around the world are throwing everything they can at the credit markets to get them working again," notes Win Thin, a forex strategist at Brown Brothers Harriman in New York, after US banks and broker-dealers borrowed a daily average of $437 billion from the Federal Reserve last week.
That topped the previous week's record of $420bn per day.
Yesterday the European Central Bank (ECB) eased the quality of securities it demands as collateral from banks, cutting the rating of acceptable bonds from A- to BBB- and extending its unlimited cash lending program until March 2009.
The ECB will now also take Sterling, Dollar and Yen-denominated bonds as collateral, provided they were issued in Europe as it fights "to influence both the price of money and the quantity of money out there," in the words of one analyst.
Julian Callow, chief economist at Barclays Capital, reckons the ECB's changes could pour an extra €450 billion ($603 billion) into Eurozone banks.
Here in London, "the banks are awash with overnight money," a veteran currency trader told BullionVault this morning. "That's why their all cutting the deposit [interest] rates they're offering to savers.
"Thanks to the Bank of England, the commercial lenders have now got all the money they could want. But the problem is, beyond lending to each other, there's nobody else they dare deal with."
Interbank lending rates quoted in London – the clear marker of bank-to-bank mistrust and panic this summer – today completed their first weekly drop since July.
The cost of a three-month bank-to-bank loan of US Dollars fell from 4.8% Monday to 4.4% Friday morning.
The cost of overnight Dollars meanwhile sank to 1.67% – a four-year low – as central-bank cash, piled up in the City, was only offered for the very shortest of loans.
"What we're seeing now is massive financial market turmoil and, I would think, significant Monetary Inflation," said Joe Conway, CEO of Gold Mining company Iamgold, to Bloomberg TV on Thursday.
"As a store of value, you're going to see more people rush to Gold."
Conway believes the Gold Price will reach $1,000 an ounce before the end of this year – a level first seen when Bear Stearns collapsed in March '08.
For British buyers today, the Gold Price in Sterling slipped down to £454 per ounce, almost 18% off the all-time record set last Thursday.
The Gold Price in Euros fell to a four-week low beneath €585 an ounce, down 14% from its record high.