'Funding stresses' as gold plummets, MF Global fallout causes confusion over who owns gold bars ...

December 12, 2011

'Funding stresses' as gold plummets, MF Global fallout causes confusion over who owns gold bars

International. Spot market gold prices dropped to US$1,670 an ounce Monday lunchtime in London – 2.3% off last week's closing spot price – while stocks and commodities also fell and US Treasury bonds rose.

Silver prices dropped to US$31.12 per ounce – 3.4% down on the end of last week.

Gold prices started the week with a 1.4% drop inside half-an-hour during Monday's Asian trade, with many analysts citing 'technical selling' and a stronger Dollar as contributing to the steep fall.

One gold bullion dealer in Hong Kong says there were rumors over the weekend of stop losses set just below US$1,700, all of which were cleared out "within seconds" this morning.

"We expect physical demand to return in some strength on approach of US$1,650," says Standard Bank commodities strategist Walter de Wet.

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"Key support for the metal lies at its 200-day moving average at US$1,617. Since early 2009, gold has consistently bounced off its 200-day moving average. Unless funding issues in Europe deteriorate substantially...we expect this support to hold."

"The next couple of days are going to be crucial technically for gold," adds Credit Agricole analyst Robin Bhar.

"Last week we were up at $1760 and we have now lost US$80 fairly quickly, that shows that rallies are difficult to sustain in this sort of environment...[given current] funding stresses and money market stresses and the dash for cash."

"Gold market people say European commercial banks are being driven to lend gold for Dollars at negative interest rates just to raise some extra cash for a few weeks," the FT's John Dizard reports.

"Until the funding difficulties at European banks are resolved," adds HSBC chief commodities analyst James Steel, "it is difficult for us to see any near term halt in gold lending. This may help keep gold prices on the defensive."

A unit of HSBC Holdings Plc meantime has asked a judge to determine the rightful owner five gold bullion and fifteen silver bullion bars it is currently storing, newswire Bloomberg reports.

Jason Fane, formerly a client of brokerage MF Global – which filed for bankruptcy in October – says the bars belong to him.

"We had a letter from HSBC that they were on the loading dock to be shipped to our warehouse contractor when there was some action taken by a third party to stop or delay shipment."

MF Global trustee James Giddens reportedly wrote to HSBC to say the silver and gold bars were MF Global "customer property", and therefore should not be released to Fane.

Other investors have also found themselves adversely affected by the brokerage's bankruptcy, including 'Martial Artist of Trend Forecasting' Gerald Celente, who was using MF Global to buy gold via futures contracts – in contrast to directly buying allocated gold.

In its final days, MF Global is alleged to have covered its own positions using funds from customers' accounts – with Giddens saying "the amount of money MF Global should have segregated for customers may be short by $1.2 billion or more."

"I simply do not know where the money is," echoed John Corzine, chief executive of MF Global when it collapsed, in testimony to Congress last week.

On New York's Comex exchange, the number of bullish minus bearish contracts held by noncommercial gold futures and options traders – the so-called speculative net long – rose 4.7% in the week ended 6 December, its first gain since the opening week of November, data published Friday by the Commodity Futures Trading Commission show.

Despite the bullish signal, "the weak market remains highly volatile to news flow," says this morning's note from precious metals consultancy VM Group, point out that gold prices have since fallen substantially.

On the ETF front, the volume of gold bullion held to back shares in the SPDR Gold Trust (ticker: GLD) – the world's largest gold ETF – has fallen slightly since the start of the month, from 1297.9 tonnes to 1295.4 tonnes as of last Friday.

By contrast, the volume of silver bullion backing shares in the iShares Silver Trust (ticker: SLV) – the world's largest silver ETF – has risen over the same period, gaining 0.6% to 9769.1 tonnes.

Here in Europe, stock markets traded lower Monday morning. In London the FTSE was down 0.6% by lunchtime, while Germany's DAX lost 1.6%.

Ratings agency Moody's meantime says it will review European sovereign ratings in the first quarter of 2012. Fellow ratings agency Standard & Poor's last week placed every Eurozone nation on CreditWatch negative – often a precursor to a sovereign downgrade.

Friday's EU summit "doesn't tackle the shorter term problems," says Commerzbank economist Peter Dixon.

"Yes, we have a plan in place to tackle the longer term problems but... I'll be very surprised if it actually generates the results many EU leaders are currently hoping for."

"The lack of progress in as far as socializing liabilities is concerned prevents any major involvement of the ECB and or the creation of common bonds in the short term," adds Jacques Cailloux, chief European economist at Royal Bank of Scotland.

Leaders agreed on Friday to lend up to €200 billion to the International Monetary Fund, which the IMF in turn could then lend to Eurozone governments. There are suggestions that some of this money could come from central banks.

However, if central banks were to lend to the IMF, "the money cannot migrate into some sort of special pot that is used exclusively for Europe," Bundesbank board member Andreas Dombret tells German newspaper Handelsblatt.

"That would be a clear breach of the prohibition of monetary financing of states. The German Bundesbank has explicitly ruled this out."

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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