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May 22, 2009

London Gold Market Report
by Adrian Ash

08:30 EST, Fri 22 May

Gold Hits 2-Month High for US Investors as China-Brazil Move to Sidestep the Dollar

THE PRICE OF WHOLESALE "spot" gold rose further for US-Dollar investors early in London on Friday, adding another $5 per ounce to its best AM Gold Fix since March 23rd at $952.50.

For European investors, however, the Gold Price was little changed on the morning - and unchanged from last Friday as the single currency reached a four-month high on the forex market - at €682 an ounce.

Both in Euros and Dollars, gold has risen 9.5% year-to-date. For UK investors, gold today stood unchanged from New Year at £600 an ounce.

"The Dollar in the last 24 hours is potentially doing something more interesting here," reckons Paul Lambert, macro-strategist at London hedge fund Polar Capital, pointing to Thursday's sell-off in both Dollars and Wall Street stocks.

Last year, the US Dollar rose sharply on "safe haven" demand, and it reached a near-perfect negative correlation with world stock markets between Jan. and April '09 as the S&P index sank to 12-year lows.

"It's early days," says Lambert to Bloomberg, "but there is a world going forward where you might have a weaker Dollar that could be independent from the behaviour of risk."

"A weaker Dollar has seen gold make solid gains," says the latest Fortis Metals Monthly from Virtual Metals' analysts, "but we wouldn't bank on the US currency falling much further.

"There is much more economic optimism in the air now, as can be seen in other commodity prices. It is not clear what impact it will have on gold. Inflation seems a long way away and so we see Gold Prices drifting lower."

Today world stock markets bounced from their 3% mid-week losses, while the price of US crude oil ticked higher again above $61 per barrel.

European coal prices rose for the fourth session running. Copper traded at the London Metal Exchange (LME) rose 3.1% after China reported new record imports for April.

The China Daily says that Bank of China, the world's third largest bank by market cap, will open its first branch in resource-rich Brazil by August. The decision comes after China and Brazil signed 13 accords on bilateral trade in Beijing this week, and further discussed billing each other directly in their own currencies, the Yuan and Real, rather than the US Dollar.

"It may take a couple of years for China and Brazil to really start using Yuan in trade because the currency is of limited use outside China," says Shi Lei, an analyst at Bank of China in Beijing to the China Post.

"It is not going to succeed," counters Guilherme da Nobrega, chief economist at the Sao Paulo brokerage of Itau Banco, Latin America's biggest bank.

"If you let people choose in which currency they want to trade, they want to trade in dollars."

Now Brazil's No.1 trading partner, China is looking to invest $1.2bn into a new port complex that more than doubles the capacity at Santos to 240 million tonnes per year.

On Wednesday a senior official at the Shanghai branch of the China Banking Regulatory Commission said the Chinese Yuan could account for 3% or more of global foreign exchange reserves by 2020.

The Vedomosti newspaper in Moscow meantime reports that Russia's foreign exchange stockpile is now more heavily weighted in Euros than Dollars, with the single currency rising to 47.5% by end-2008 against 41.5% held in the world's official reserve currency.

Only China and Russia make the top leagues for both Gold Bullion and foreign currency holdings according to new analysis from Virtual Metals here in London.

"We must get our fiscal house in order or risk having government borrowing crowd out productive private investment," said US Treasury secretary Tim Geithner to a congressional panel on Thursday.

"My basic obligation is to make sure we put in place policies that sustain confidence in this economy, in our currency, that we sustain a strong Dollar."

Yesterday Bill Gross, chief of bond-management giant Pimco, said the United States' credit rating will "eventually" follow the UK's downgrade from stable to negative.

But "The impact of a possible downgrade on the US would be much greater than the one on the UK because the Dollar still represents 60% of global foreign reserves," notes Hidetoshi Honda at Mizuho Corporate in London, speaking to Bloomberg.

"We'd expect massive outflow of dollars from foreign reserves so that is dragging the Dollar lower."

Yesterday the federal authorities took control of Florida's largest banking institution - and the 34th institution to be closed so far this year - BankUnited FSB.

Full-year 2008 saw a total of 25 banks fail in the United States. Only three were closed in 2007. The second-largest failure after IndyMac last July ($10.7bn), BankUnited FSB will cost the Federal Deposit Insurance Corpoation (FDIC) some $4.9 billion.

The FDIC's funds were already reduced to $18.9bn by end-2008, down by two thirds from end-07.

In California, meantime, this week's failed ballot on tax hikes and spending cuts in California leaves the sunshine state with a budget deficit of $21.3bn.

Struggling to close its own $17.7bn budget deficit, New York City "gave away" almost $1.4 million of tax-payer's money in the bond market, Bloomberg reports, by failing to get the best deals on its revolving loans as US interest rates sank towards zero early this year.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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