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SPOT GOLD PRICES jumped
$34 early in London on Monday, bouncing well above last Friday's low at $820
to touch $860 an ounce as world stock markets sank in the face of desperate
promises of Tax-Funded Aid
from major governments.
Crude oil sank 4% to trade below $90 per barrel, an eight-month low. Soft
commodities all fell hard, as did base metals, while the low-yielding US
Dollar and Japanese Yen both rose sharply on the currency markets.
"The oil-gold-Euro correlation is well and truly busted," said a London trader to BullionVault by phone this morning.
"Oil is tumbling and the risk aversion trades are flying. The Yen is
going through the roof now everyone's taking about deflation."
During the 1930s Great Depression, the purchasing power of Gold Bullion more
than doubled for US investors as the Dow Jones index dropped seven-eighths of
its value from top to bottom.
For Japanese investors, already suffering deflation in asset prices for
nearly two decades, the purchasing power of Gold has risen by more than 85%
since 1989.
The Nikkei stock index, in contrast, remains almost three-quarters off its
top. Residential Tokyo
real estate has just slipped back to 2005 levels, down by some four-fifths
from the top of the late-80s bubble.
"Gold will [now] outperform its commodity peers as investors seek refuge
from risks associated with the US Dollar, shaky banks and extremely volatile
equity markets," reckons new analysis from BMO Capital Markets, the
North American research and brokerage group.
"Long term, gold should benefit from a weakening trade-weighted Dollar,
which is needed in order to help reverse the substantial global trade and
current account imbalances (with China and others) in existence
today.
"Other supportive factors include the possible monetization of the US's massive
and growing public debt obligations, and rising physical demand coming from
the developing world."
Following the final approval of $700 billion in tax-funded aid to Wall Street
on Friday, South Korea
today pledged $240 billion of foreign currency reserves to Seoul's biggest banks.
Germany
promised on Sunday to back all private bank deposits, matching last week's
pledge from the Irish government and sparking a fresh run of
"Competitive Bail-Outs" in Austria
and Denmark.
"Central banks are now being seen as the main providers of liquidity
within these markets, and it's very bad for sentiment," said one State Street
analyst in Hong Kong to Reuters this
morning. Looking at the deeper problem of surging interest rates in the open
market – a surge which has forced a collapse in Gold Futures and
options trading – "if G7 central bankers cut rates in a
co-ordinated way," says Steven Barrow at Standard Bank, "the market
assumes it will be because all else has failed.
"Rate cuts, if they are to come in this way, could come very soon
indeed."
Asia's main stock markets today dropped more than 5% of their value, while
the Japanese Yen – previously used to fund highly geared bets outside
Japan – jumped to a two-year high vs. the Euro.
For Japanese investors holding gold, the price in Yen held around ¥2,840
per gram. European gold buyers saw the Gold Price in Euros leap to €632
an ounce – up more than 4.2% from Friday's finish – as the single
currency sank to a new 13-month low vs. the Dollar of $1.3545.
"What are investors going to do with the massive amount of dollars that
the US has flooded
out?" asks Dr Pongsak Hoontrakul,
senior research fellow at Chulalongkorn
University in Bangkok, speaking to The Nation.
"If investors do not want to hold the Dollar, what other choices do they
have for reserve currencies?"
Investors trading the SPDR Gold Trust – the world's largest Gold ETF
– last week pushed its holdings up to 755 tonnes. But with hedge funds
and other leveraged speculators forced to raise cash to redeem clients, meet
margin calls, and settle their debts, the trust shrank by two per cent on
Friday.
The total number of Gold Futures and options contracts now outstanding shrank
by almost 9% in the week-to-last Tuesday, according to new data from US regulator
the Commodity Futures Trading Commission (CFTC).
Since peaking in January, outstanding volume in the Gold derivatives market
has shrunk by more than one-third. The growing bid for physical metal, in
contrast, has cleaned out coin shops worldwide, emptying even the largest
retail gold dealers of the leading products.
Wholesale Gold Bullion dealers remain fully stocked, with turnover in London – heart of
the world's professional gold market – seeing around $63 billion of
physical trading per day.
Adrian Ash
Head of
Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash is head of research at www.BullionVault.com –
giving you direct access to investment gold, vaulted in Zurich, on $3 spreads and 0.8% dealing
fees.
Current gold price, no delay
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Note: This article is to inform your thinking, not lead it. Only you can
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money at risk. Information or data included here may have already been
overtaken by events – and must be verified elsewhere – should you
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