Gold Investments Market Update – Real and Genuine Concerns of Another Bear Stearns and Growing Systemic Risk

Gold

Gold finished trading in New York yesterday at $925.90, down $6 and silver fell to $17.85, down 43 cents. Gold then sold off somewhat in the New York Globex electronic market before rising again in Asian and early European trading to over $930 per ounce. A lessening likelihood of a military confrontation with Iran contributed to the fall in oil and gold’s slight sell off.

However, risk aversion is reasserting itself with the ominous news regarding the U.S. financial sector. Fannie Mae and Freddie Mac face further writedowns and likely need fresh capital infusions and Lehman Brothers may also need to raise more capital. These issues led to weakness in equity markets in the U.S. , Asia and saw sharp falls in Europe this morning.

The FTSE was not helped by the British Chambers of Commerce stark warning that Britain’s current economic situation is “grim and ominous”. Nor was it helped by the Royal Bank of Scotland report which said that an expected 20 per cent drop in house prices over the next two years could destroy up to 100 per cent of the value of land banks held by Britain’s embattled housebuilders, threatening their very survival. Royal Bank of Scotland predict a 70 per cent fall in land prices, compounding even bleaker outlooks from Merrill Lynch and Cazenove over the past week.

Oil is flat <$141.30- Light Sweet Crude Oil Future – AUG08> after yesterday’s fall in price and the dollar has not moved against the euro after yesterday’s fall <1.5726> and thus gold will likely seek direction from equity markets. Gold’s inverse correlation to equity and bond markets over the medium to long term has clearly been shown in recent months and this inverse correlation will likely continue in the coming months.

Safe haven buying on continuing financial and economic worries will continue and should increase as there are real and genuine concerns of another Bear Stearns situation developing with obvious attendant systemic risks. In just two months, the price of buying insurance against the default of large regional banks has more than doubled.

Gold tested the 100 day moving average at $915 yesterday and as posted yesterday it proved strong support and $915 and $900 should continue to provide strong support.

Today’s Data and Influences

Federal Reserve Chairman Ben Bernanke will speak today but he is expected to confine his comments to financial market regulation. As there is little economic data of note today the market will continue to watch oil for the dollar’s near-term direction.

Data out of the UK continue to disappoint. The most recent survey shows UK firms are facing the worst cash flows on record showing a real risk of recession.

Silver

Silver is trading at $17.80/17.82 per ounce (1100 GMT).

PGMs

Platinum is trading at $1988/1998 per ounce (1100 GMT).
Palladium is trading at $447/451 per ounce (1100 GMT).

Mark O'Byrne

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