08:14 EST, Tues 26 June
SPOT GOLD PRICES began the London session on Tuesday trading below $650 for the third time in four sessions, holding at $649.50 as the opening on Wall Street drew near.
Down $2.50 from the overnight high in Asia, spot gold prices slipped 0.45% lower from Monday’s start. ‘It’s going to be a very quiet trading session in the gold market, ranging between $645-$655, before the Fed meeting,’ said Peter Tse of ScotiaMocatta in Hong Kong to Reuters earlier.
According to the Treasury bond market, the US central bank – which announces Dollar interest rates on Thursday – will remain on ‘hold’ for the 12th month running at 5.25%. Gold most often gains when global interest rates, led by the US, fail to rise ahead of inflation.
‘The gold market has been quiet since the beginning of this month and investors are taking a wait and see attitude until a clear direction emerges in the market,’ agrees Chiaki Kanako, chief dealer at Tanaka Kikinzoku – Japan’s largest wholesaler of gold.
Overnight in Tokyo, gold futures contracts for April ’08 slipped 1% against a rising Yen, closing at the equivalent of $656.46 per ounce. The Japanese currency rose from a four-and-a-half year high vs. the Dollar – and bounced from a near-all time low vs. the Euro – following a warning from Koji Omi, the Japanese finance minister.
‘As I have repeated, Japan is carefully watching foreign-exchange rates,’ Omi warned a news conference earlier. ‘The fundamentals of the Japanese economy are solid. Disorderly moves of foreign exchange rates are undesirable.’
But Omi-san’s brave words jar with Tokyo’s monetary policy, however. The BoJ continues to lend money at 0.5% or below – the lowest rates in the world. Japanese government bond yields slipped back this morning, taking the benchmark 10-year yield to 1.875%, down from a one-year high of 1.985% hit two weeks ago.
US bond yields also fell as prices rose early Tuesday, after the National Association of Realtors said yesterday that the US housing market continues ‘to underperform’.
Turnover in the market for existing US homes slipped 0.3% last month from April, recording a 10.3% drop from May ’06. Prices achieved also fell after home-owners had refused to discount in April. The median sale price across the US in May was 2.6% lower from a year earlier. Data for new-home sales are due at 10:00 EST today.
‘The US housing market is weak and will be a drag on the US economy,’ reckons Hiroki Shimazu, a fixed-income economist at Mizuho Securities in Tokyo. The two-year bond yield dropped to 4.88% as London opened, suggesting lower US interest rates ahead. Jens Lauschke, a strategist at Singapore’s largest bank, DBS Group, now reckons the US Fed will cut its interest rates to 4.5% by the end of this year.
Back in Tokyo the Nikkei closed flat on Tuesday, repeating the sideways action seen in New York and Europe yesterday. London’s largest hedge fund, GLG, saw its stock rise 7% on its first day of trading on Wall Street. Queen’s Walk, a London-listed hedge fund specializing in subprime US mortgage debt, announced that it has cut its leverage from 25 times to below seven.
Despite the growing risk of a serious credit crunch in the global debt markets, however, ‘spot gold prices have been undermined by the Euro’s failed attempt to near $1.35 on the currency market,’ reckons one Tokyo researcher. But ‘as long as the Bank of Japan continues to tighten policy at a very slow and gradual pace, it seems likely that investors will continue to use the Yen as funding for their carry trades,’ as Standard Chartered Bank noted in a report yesterday.
To date, gold has attracted strong flows from Japanese citizens looking to defend themselves against the collapsing value of their currency.
Standard Chartered now predicts the Bank of Japan will wait until Dec. before raising its rates to 0.75%. ABN Amro forecasts the Yen will drop a further 2% vs. the Dollar by the end of this summer. Citigroup, the world’s third-largest currency trading firm, reckons the Yen will fall to ¥125 per Dollar by that time.
In short, the Japanese authorities remain intent on destroying the Japanese Yen with ultra-low interest rates. Investment flows out of Japan and into gold look sure to continue for as long as cash savings fail to pay.
Adrian Ash is editor of Gold News and head of research at www.BullionVault.com, the fastest growing gold bullion service online