Gold Rally Continues as Dollar, Yen Slip; World Mining Output Set to Fall from 12-Year Low as Exploration Funding Dries Up
London Gold Market Report
THE PRICE OF GOLD BULLION continued to rally on Tuesday, rising to a four-session high above $752 per ounce as world stock markets also bounced after falling 12 times in 19 days in October.
Government bonds fell fast as money moved back into equities, pushing the yield offered by 10-year US Treasuries ten basis-points higher to 3.79%.
Consumer-price inflation in the United States was last pegged at 4.9% annually.
US crude oil futures also turned higher early Tuesday, bouncing 2.4% from yesterday's 15-month low to $64.75 per barrel. Food stuffs and base metals jumped alongside, led by an 11% gain in nickel.
Both the Strong US Dollar and Japanese Yen meantime slipped back on the currency markets, dropping 1.5% and 3.5% respectively vs. the Euro.
"Today is Diwali, the Indian festival of lights," notes the London team at precious-metals dealer Mitsui, "and leading up to this festival, physical gold demand in India is quite strong.
"The difference this year is that this time there has been reports of strong demand across the globe, and given this insatiable appetite for Gold, it's no wonder prices have recovered to the $750 area.
"Expect this demand to slow if Gold approaches $800 per troy ounce," advises Mitsui, but "with another round of interest rate decisions in the US later this week, gold could find fresh legs to travel higher."
The Fed's dramatic rate cuts starting in Sept. '07 saw the Gold Price leap from $650 an ounce above $1,030 by mid-March.
Today the Central Bank of Iceland hiked its key lending rate from 12% to 18% in a bid to stall the collapse of its currency – now worth two-fifths less on the forex market than at the start of '08 – as part of the measures demanded by the International Monetary Fund (IMF).
With a total of $200 billion in reserves, the IMF has now committed one-quarter to aiding Iceland, Ukraine, Pakistan, Hungary, Belarus and Serbia.
"When you tot up the countries across the [East European & Baltic] region with external funding needs," says Neil Schering, an emerging markets strategist at Capital Economics in London, "you get to $500bn or $600bn very quickly – and that blows the IMF out of the water.
"The Fund may soon have to start calling on the West for additional funds."
This morning the Bank of England said it believes the total losses to private banks as a result of the global solvency crisis could total $2.8 trillion total losses.
The IMF forecast $945 billion this spring. Ben Bernanke – chairman of the US Federal Reserve – began the bidding in July last year at $100 billion.
"Intervention is needed in the Japanese Yen," says Steven Barrow at Standard Bank here in London, "not because it might help stabilize Japan's stock market, or because it might stem the plunge in its trade balance.
"Instead, Yen Intervention is needed in order to slow down the global de-leveraging and mass position-unwinding that's going on right now."
Global credit markets remain closed to Latin American infrastructure projects, reports Latin Finance, with Barclays Capital advising clients that while individuals countries may remain strong, "evaluating vulnerability a complicated task."
Yesterday the government of Austria was forced to cancel a new auction of sovereign bonds due to lack of demand – the third such delay to hit European states so far this month.
New finance has also dried up for mining companies worldwide, reports Martin Creamer in his Mining Weekly, knocking London's largest mineral groups 44% lower on the stock market since end-June.
Most telling for future Gold Mining Output, the top 20 junior mining stocks listed on London's Alternative Investment Market (AIM) dropped more than 50% of their value between July and Oct.
No fresh funds were raised by new issues of AIM mining shares, and secondary issues raised just £6.1 million ($9.5m) in September.
"In just three months, the value of Aim's mining universe has more than halved," notes Dr.Tim Williams, director of mining-and-metals analysis at Ernst & Young. "Access to new capital for those without great projects, is, at least for the time being, closed."
For many junior exploration firms, Dr.Williams says, the situation is now "nearing critical".
Last night the head of South Africa's Harmony Gold – the world's fifth largest gold miner by ounces – said he's no longer looking to expand via early-stage projects, but rather through buying already-productive mines.
"Probably 12 months ago we were looking at exploration properties and early projects," said the CEO, Graham Briggs, to MiningMX.com. "Now we're looking more towards the production side of things."
Gold Mining production worldwide fell 6% during the first-half of the year compared with H1 2007, the World Gold Council said Monday.
Totaling just 590 tonnes between April and July, global gold mining output was the lowest since 1996 according to data from the US Geological Survey.
The Spot Gold Price in US Dollars has more than doubled since world gold mining production peaked in 2003.
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2008
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