Gold Keeps

Gold Keeps "Extreme Gains" in Thin Trade as European Banking Shares Sink on Failed Rescue Bid

SPOT GOLD PRICES drifted in thin trade on Friday, bouncing off yesterday's low at $930 per ounce as crude oil ticked down and the US Dollar held flat after Thursday's 1.2% jump.

New York was closed for the long Independence Day weekend.

"Gold is still holding onto its recent extreme gains very well," noted the Mitsui team here in London this morning.

"[But] from here we would have to point out that the resistance in gold at $945 remains very much a barrier to higher prices for now."

Three times this week the Gold Price broke but failed to hold above $945 per ounce – a level it briefly held for two days in mid-April when retreating from the all-time record high of $1,032 touched on March 17th.

With New York now closed for the Fourth of July holiday, gold-dealing in London was "quiet and lacking movement," according to one dealer. Thursday's near 2% drop came after the European Central Bank (ECB) in Frankfurt Raised Euro Interest Rates for the first time in 13 months, but signaled a pause before it takes any further action to calm the currency zone's 16-year record in consumer-price inflation.

In Ireland – where real interest rates have been below zero since 1999 – the Irish Independent warned that the 0.25% rate hike will cost home-buyers and borrowers €1 billion in extra lending fees.

Today the Gold Price in Euros held steady at €594 per ounce.

"This week's rally in Gold was driven by a series of factors," says Wolfgang Wrzesniok-Rossbach at Heraeus, the German refining group.

He cites "the rising oil price...a very strong Euro against the US Dollar...further weak US economic indicators...[and] increased sabre-rattling between the West and Iran because of the mullah regime's nuclear program."

Today crude oil slipped $1 from near record levels after the government in Tehran told Washington today it may be willing to discuss "common ground" over Iran's on-going nuclear development program.

European banking stocks meantime dropped on a series of downgrades from analysts at Goldman Sachs, knocking the Cac 40 index in Paris towards its 17th weekly loss for 2008 so far.

Government bond prices rose across Asia and Europe, in contrast, pushing longer-term interest rates lower and confirming the "inverted yield curve" on UK gilts.

With long-dated debt now offering investors lower income than near-term bonds, the market suggests a severe economic slowdown may be due.

Today the FTSE100 lost 1% of its value to touch a fresh 32-month low after Bradford & Bingley – the UK's eighth largest bank, and a specialist in "buy-to-let" loans to small real-estate investors – admitted that a crucial £400m capital raising fell through last night.

TPG Capital, a US private equity group, pulled out of the deal after B&B's credit rating was downgraded by Moody's late Thursday.

Under an emergency deal brokered by City watchdog the Financial Services Authority, B&B's largest shareholders – led by pension and insurance funds Legal & General, M&G and Standard Life – then said they would accept a new rights issue at 55p per share.

But losing 10% for the day, however, B&B's share price today dipped below that level, putting the new rescue in doubt.

"There is a very real risk that achieving £400m of funding at 55p will not be possible," said one analyst to the Financial Times this morning.

"B&B is a binary situation: either it is worth zero or materially more than the current market value."

The bank has now lost 86% of its value over the last 52 weeks.

Over in India – the world's No.1 retail market for physical Gold – "there is no demand but there are a lot of investors selling," said one wholesaler in Mumbai to Reuters this morning.

"Investment bars are being sold mainly by those who have taken a hit in stocks," he added.

India's BSE stock index has now lost one-third of its value since the all-time records of early January.

The Hang Seng index of Chinese stocks today closed the week almost 3% lower, while over in Tokyo this morning – where the Nikkei stock index has dropped 13% so far this year – Gold futures ticked 0.3% lower today to finish Friday at ¥3,235 per gram.

Equal to $943 per ounce, however, that was Gold's best weekly close on the Tocom exchange in Tokyo since the 24-year high of mid-March.

Adrian Ash
BullionVault