Daily gold report: Thursday 5th July

Spot gold prices moved gently higher against the US Dollar in London on Thursday, adding $2 per ounce from the overnight start in Asia to break $656 just before the US open.

‘People are reluctant to take new positions ahead of New York trade today after the Fourth of July holiday,’ reckoned Shuji Sugata at Mitsubishi Corp. Futures in Tokyo, to Bloomberg earlier.

‘But the gold market remains bullish,’ he added, ‘supported by the falling Dollar and rising oil prices.’

Brent crude oil traded in London rose above $73 per barrel this morning. US crude oil held near its own 10-month highs. The Dollar dropped 0.3% against the Japanese Yen.

After the Bank of England raised UK interest rates to a six-year high of 5.75%, the European Central Bank also did as the markets expected, holding Eurozone rates at 4.0%.

‘People don’t want to trade gold too heavily ahead of the US payroll data due Friday,’ said another Tokyo analyst to Reuters. ‘Gold will stay range-bound until we confirm the outcome of these events.’

For Australian investors wanting to buy gold today, the metal held at A$765 per ounce, unchanged after the Reserve Bank of Australia chose not to raise its interest rates from their current 6.25% – the seventh month of ‘no change’ in a row.

The Bank of England’s move was widely expected, since ‘credit and broad money continue to grow rapidly,’ as the Bank admitted in its accompanying statement. That underplays the rate of credit expansion in the UK, however, where broad M4 has now grown at double-digits annually since spring 2005.

Eighteen of the world’s top 20 central banks are in fact presiding over double-digit rates of annualized growth in their local money supply. Accounting for tax and inflation, however, this fifth ‘baby-step’ inside 12 months from the Bank of England still leaves real interest rates at just 0.3% per annum for basic-rate UK taxpayers. Higher-rate savers are suffering negative real interest rates of 0.85% based on May’s retail price index.

With today’s rate decision already priced into the currency markets, the Pound Sterling pulled back from yesterday’s fresh 26-year high against the Dollar to trade as low as $2.0120. That dip put the Sterling price of gold at £325.50 per ounce – some 0.4% higher from Wednesday’s opening.

The Euro meantime rose above $1.3660 – its highest level against the Dollar since April 30th. That pulled the price of gold in Euros back to €480.60 from an earlier spike above €482 per ounce.

Even though few analysts had expected a surprise change from the ECB’s 4.0% interest rate, Eurozone bond prices slipped in early trade, pushing the 10-year yield up to 4.62% in the bond market. US Treasury bonds also slipped in price, pushing the 10-year yield four points higher to 5.08% at the London opening. In the corporate debt markets, meantime, last month’s move through the 5.0% barrier continues to rattle investors.

‘There are some very scary analogies between high yield corporate bonds and the mortgage market,’ says Kevin Lorenz, a fund manager who runs $2.5 billion of high-yield assets at TIAA-CREF in New York, one of the world’s largest bond funds. ‘You cannot do fundamental analysis and believe that those are creditworthy companies.’

Twelve high-yield bond issues have now been pulled through lack of demand in the last week, according to Bloomberg data. Between Jan. and June, high-yield debt issues had risen by 70% to a record $1 trillion. ‘More securities than ever have the lowest credit rankings,’ says the newswire, ‘with CCC ratings assigned to 26.5% of the new debt.’

In 2006, triple-C rating were assigned to just 15% of all corporate bond issues. That rating, says Fitch – the credit ratings agency – means the debt carries a ‘high default risk’.

If leveraged investors can’t borrow to fund their next buy-out, they can always try the equity market instead. Kohlberg Kravis Roberts & Co., the leveraged private equity firm which pulled a $1.55 billion bond issue last week, said Wednesday it plans to float as a listed stock, following the lead of its rival Blackstone Group.

KKR could be worth around $30 billion according to The Times of London. Blackstone’s shares are already trading below the IPO price of two weeks ago.

Adrian Ash is editor of Gold News and head of research at www.BullionVault.com, the fastest growing gold bullion service online


Leave a Reply

Your email address will not be published. Required fields are marked *