Sunday 14 January 2007

Big Problems in Sub Prime Mortgage Markets

This article from Weiss Research Florida shows the unsettling facts with unfettered lending on property



Money and Markets
Friday, January 12, 2007

Dear Subscriber,

ContiFinancial ... EquiCredit ... The Money Store ... Southern Pacific Funding. Maybe you’ve never heard of them, but they were the subprime mortgage lending stars of the mid-to-late 1990s.

They specialized in making loans to borrowers with bad credit, little or no down payments, and a host of other problems. Once they made loans, they’d sell them off to Wall Street firms and other investors, who would help package them together into bonds — a process known as “securitization.” The subprime lenders would use the proceeds to make additional mortgages, and the process would start all over again.

The gravy train seemed unstoppable. The subprime lenders made billions of dollars worth of loans. The Wall Street securitizers got crazy rich. Then, just like that, it all came crashing down.
The major reason: Gunslinging hedge fund Long-Term Capital Management imploded in 1998. As its market bets went south, the firm lost billions of dollars. That, in turn, brought the market for high-risk debt to a standstill.

Investors soured on risky home loans. As a result, the subprime lenders found themselves in a vicious cash crunch — unable to get the funding they needed to keep the mortgage “production lines” running.

Lenders started dropping like flies, either going bankrupt or selling themselves off to larger institutions. Thousands of employees lost their jobs in the process. Delinquencies, loan losses, and foreclosures surged.

It was ugly. It was painful. And it just may be happening again ...



Safe Money Report article titled “How to Wade Through the Mortgage and Real Estate Cesspool.”

Then, this past July, I
told you about a bunch of mortgage practices that were setting the stage for a major blow up. I explained that “stated” income mortgages, onerous fee structures, inflated appraisals, and other exotic mortgages were all conspiring to stick borrowers with sharply rising payments.

Now, it’s all hitting the fan. The 15th and 16th largest U.S. subprime lenders are collapsing. Mortgage Lenders Network is shutting down its wholesale lending operations and furloughing 80% of its workers. Ownit Mortgage Solutions just filed for bankruptcy.


And the companies still doing business? Many of their stocks are freefalling:


Fieldstone Investment (FICC) dropped 23% in a single day in November, and it’s lost about three-fourths of its value in a year.
Fremont General (FMT) has fallen almost 39% since last January.


Stocks like HomeBanc (HMB) and NovaStar Financial (NFI) are trading at their lowest levels in years.
Things aren’t as bad as they were in 1998 ... yet. But if the steady selling in mortgage bonds turns into panic selling, it could get there — fast!


What This Means for the Housing Market ... and You


The recent action in the subprime industry just underscores what I’ve been saying for a long time: The housing bust will stretch its tentacles into many related markets.
A lot of people — both homeowners and investors — are going to get hurt. And it has not yet run its course.


Indeed, the nasty fallout in the subprime lending industry could even exacerbate the housing downturn. After all, one force that prolonged the housing bubble was the rash of ridiculously easy lending. Now that subprime lenders are starting to go belly up, the ones left standing are tightening their guidelines.


That’s going to make it harder for home buyers and marginal borrowers to qualify for loans. This could weigh on the real estate market as we close in on the key spring home shopping season.
You can see why I think it’s too darn early to pile back into housing and lending shares. Wall Street has been talking itself hoarse that the “bottom is in” for these stocks. But if the subprime meltdown spreads, bottom fishers could get filleted.


Meanwhile, if you’re in the housing market, don’t ignore these developments:


If you’re trying to sell, you don’t want to screw around. You have to get your price down to a level that will attract buyers, even if it bruises your ego a bit.


If you’re in the market to buy a home, the ball’s in your court. Don’t be ashamed to make low-ball bids, ask sellers to pay your closing costs, or make even the smallest home repairs.


And take note — easy mortgage money will be drying up. Later in the year, buyers will probably need more cash reserves, a larger down payment, and fully documented income, especially if they have low credit scores.


Until next time ...
Mike

© 2007 by Weiss Research, Inc. All rights reserved.15430 Endeavour Drive, Jupiter, FL 33478.

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Thursday 11 January 2007

Is This a Blunder from the Bank of England?

More of the same from the Bank of England, who seem intent on reverting to type and wishing for a “Strong Pound”

This will crush exporters and suck in imports. All in the mistaken belief it will reduce inflation for “our” benefit.


So all you businesses out there who borrowed to expand and grow-well too bad, the bankers arn't happy about all you whingers asking for their charges back so they will stuff you on rates!!

Or is it a currency led conspiracy to drive down the price of Gold, so that the banks can attack in concert when they are ready to ramp the prices [of Gold]?

Comments Please!

Bank of England Raises Rates to 5.25% today

The Financilal Times breaks this worrying news today

By Jamie Chisholm, Economics Reporter.
Published: January 11 2007 12:02 Last updated: January 11 2007 12:02


Interest rates hit their highest level in more than 5½ years on Thursday after the Bank of England surprised the City by raising the cost of borrowing to 5.25 per cent.

The quarter of a percentage point increase wrong-footed analysts, most of whom had expected the Bank’s monetary policy committee to stay its hand this month, before possibly introducing an increase in February.

Sterling and yields on government bonds jumped as the Bank
said it had made the move because “the margin of spare capacity in the economy appears limited, adding to domestic price pressures.”
Domestic demand was growing steadily, while “credit and broad money growth remain rapid.”


“It is likely that inflation will rise further above the target [2 per cent] in the near term, but then fall back as energy and import inflation abate. Relative to the November Inflation Report, the risks to inflation now appear more to the upside,” said the Bank in a statement accompanying its decision.

The immediate business response to the Bank’s move – which came as the European Central Bank kept eurozone benchmark interest rates on hold at 3.5 per cent – was mixed.

Graeme Leach, chief economist at the Institute of Directors said: “This was a tough but wise decision. The MPC needed to stamp down on inflation given the upside risk at present.”
However, Ian McCafferty, chief economic adviser to the CBI, the employer’s body, said: “It is disappointing that, with only tentative indications about the outcome of the wage round, the Bank has already decided to increase interest rates. If part of the intention was to dampen wage increases, it is doubtful a rate rise will have the desired effect.”

A recent
Reuters poll had shown that only one out of 50 economists thought the meeting would end with news of a quarter of a percentage point hike.

UK government bond prices tumbled and yields rose dramatically as traders confessed they were stunned by the Bank’s move.

“Hardly anyone was expecting this, so we saw some big moves at the short-end of the curve,” one London-based trader said.


Financial Instability

The gap between the 'haves' and 'have-yachts' keeps growing with the stock market. Watch out for that iceberg!

MORE THAN 1,000 YACHTS went on display last week at the New York National Boat Show. They included the $1.1 million Cruisers Yacht 520 Express.

But that's peanuts compared with the Sunseeker Trideck, now on sale in Mayfair, London. Complete with a dining table made of American black walnut that seats twelve, it weighs more than 150 tonnes and costs $16 million.

Never mind the price tag. Boat yards expect strong orders for such opulence in 2007, according to Reuters. And why not? Strategists at the top 14 firms on Wall Street all agree the US stock market will rise this year. Up on the sky deck, money shufflers from across the world are sipping cocktails in the hot tub.

The Dow just made a new all-time high (in Dollar terms, at least). Australian stocks keep hitting fresh record highs. British house prices have trebled in 10 years. The global market in fine art rose 23% last year.

So it's easy to see where all the money went – even if you can't see where it came from. The flood of liquidity unleashed by central bankers went into asset prices, rather than into the cost of living. Okay, the expense of finding an electrician or plumber might have risen as fast as your house price. But the cost of living billed each week by Wal-Mart, Tesco and Gap has sunk where it hasn't stayed static.

Here at BullionVault, however, we can't help wondering where all the money came from...and where might it go?

Consumer debt has been soaring – and asset inflation still surging – even as borrowing costs have risen. Last year saw record new debts for the household sector in the United Kingdom. So says the Bank of England. Yet the Old Lady herself raised base rates to take the heat out the bubble.

So did the Fed in Washington...the ECB in Frankfurt...and even the Bank of Japan in Tokyo. The orgy of debt and investment continues regardless. How come?

"New-fangled forms of money were invented that were beyond the reach of central bank control," explain the analysts at Independent Strategy in London. Their report is dated April '06...but as with any unfinished jigsaw, we're glad the missing piece has turned up at last.

"In a nutshell," it says, "dump your best-loved definitions of liquidity as being some form of measurable money supply. Money left that runway years ago and ascended into a zenith of its own creation."

Today's money bubble is dubbed 'New Monetarism' by the eggheads at Independent Strategy. They pick up where John Exter's 'Golden Pyramid' of the 1970s left off. And instead of gold at the base – with paper money, bonds, Eurodollars and Third World debt teetering above – the "inverted pyramid of global liquidity" now puts coins and notes at the bottom. No need for gold in this brave new world!

Next comes broad money – the checking accounts, bank deposits and short-term notes that most people still think of as cash. Above that, and one-fifth larger by value, comes securitised debt – corporate bonds, mortgage-backed assets and credit card debt sold to insurers desperate for income.

And there...up at the top...which would be the apex if the pyramid weren't upside down...sit derivatives. Three times greater than everything else put together, they're worth a massive $340 trillion in total. No, that's not money you can spend at the shops. But it works just the same for the money shufflers looking to push all assets higher.

"Using either power money (notes and coins) or broad money (your cheque book), you can do your weekly supermarket run and even buy your car," says Independent Strategy. "With securitised debt (which is what your home loan will become), you can buy a house or you can borrow to invest. With derivatives, you can invest only in financial assets and commodities."

But my, how you can invest! Derivatives outweigh the world's annual economy eight times over. They account for more than a third of all trades at the London Stock Exchange each day. Why settle for 1,000 shares when a contract for difference (CFD) lets you control 10,000 shares for the same price? And why not borrow against the mortgage-backed bonds you just bought to finance the trade?

"The higher the asset markets move, the more liquidity asset prices can create," writes Dr. Marc Faber in his latest Gloom, Boom & Doom Report. "Not every owner [of an asset] will use his borrowing power and leverage...But if an asset bull market has been in existence for a while, more and more investors will become convinced that the up-trend in asset prices will never end and, therefore, they will increasingly use leverage to maximise their gains."

Gearing begets gearing, in other words – and not only because leverage starts to feel safe. A short paper from Pimco, the world's biggest bond fund manager, notes that if some investors use leverage, then all other investors have to join in or lose out. Prices are pushed higher, pushing potential returns lower. Anyone dumb enough to avoid using leverage finds himself chasing riskier assets to increase his yield. But he'll only find that the leveraged investors already got there before him!

"Unlevered investors eventually begin to realize that leverage constraints are forcing them to hold the wrong securities," writes Vineer Bhansali. "So they begin to relax their leverage constraints either explicitly or implicitly (e.g. with 'packaged' solutions that allow leverage to be had via a structured note)..."

Unlevered investors, of course, include you, me and everyone else trying to save for retirement. So whether you know it or not, chances are that a chunk of your money has moved out of plain-vanilla mutual funds into higher risk or levered assets...chasing yield like everyone else as bond prices rise and gearing becomes essential.

Meanwhile, every time a home buyer takes out a new loan...and the debt's sold on to the bond market...and that bond's then sold as part of a structured note playing on interest-rate spreads geared 20 times over...the money shufflers on Wall Street and in London take a bit for themselves.

Hence the New York National Boat Show and the $40 billion in bonuses paid this month to US and UK money managers. The haves and have-yachts only get richer as the liquidity pyramid grows larger.

What will happen when it wobbles and falls over? Watch this space...

Adrian Ash, 10 Jan '07

Wednesday 10 January 2007

Your Fund Managers Performance

Most top executives and fund managers underperform their various benchmarks. How much do top executives investment managers earn for underperformance?

One recently ousted CEO reportedly received a $210 million "severance" package, though the company's share price performed poorly during his six-year tenure.

Big paydays on Wall Street appear to give new meaning to the phrase "beyond the realms of fantasy" -- Goldman Sachs alone had a reported year-end bonus pool of $16.5 billion, yes billion (or more than $600,000 per employee).

And so it goes on….

Now, the various forms of recent attention paid to big paydays aside, the fact is that these huge amounts going to CEOs/Wall Street are part of a trend that's been unfolding for a long time. In 1970, for example, CEO pay was about 30-times that of an average worker; this multiple has increased steadily to about 100-times today, and is closer to 500-times if benefits and stock options are added.

In the light of all this insanity, what chance do you think you’ve got of making any money on the stock market or anything linked to it, like your pensions!

Gold vs Currency

From the essay by Gene Arensberg at ResourceInvestor.com, as he thought that it summed it up the LONG TERM bullish case for gold particularly well.

He observes "A secular bullish perfect storm trend for precious metals continues. Rapidly escalating global investor demand, easier participation by investors via ETFs, conversion of Middle East petroleum dollars to gold, rising new demand from Asia, possible central bank buying partially offsetting central bank selling, conversion from dollars to gold by large US dollar denominated foreign exchange reserves, declining gold production, increased political and NGO interference to bring new sources on line, rapidly escalating costs to produce, delays and shortages of equipment and manpower, previous two-decade bear-market-induced shortage of intellectual capital for miners, safe-haven buying to hedge strong, reckless, competitive dilution of under- backed fiat paper currencies, probably continued de- hedging and continued troubling global political and religious tensions are just some of the factors contributing to the long-term bullish winds now blowing."

Him saying this means that "In real terms, gold remains undervalued versus nearly all other commodities and strongly undervalued as measured by the world's fiat paper promises [currency]."

In short, one more reason to buy gold. Now. Today.

Keep your eyes on the charts and look for the longer term trends

And, even more so for silver.

Monday 8 January 2007

Dollar Bull Fights Back

From Dan Denning user of Bullion Vault

Last night I saw an image of a wounded bull, bleeding between the shoulder blades, and taunted by a matador with a sword...Then, instead of doing what he was expected to do (stare his executioner in the eye and die), the bull charged into the crowd, scattering the blood-thirsty spectators.Of course, the bull died anyway. But not without a fight.That’s what the US Dollar charts tell me about 2007. The buck is going to rally. The alternative is its immediate destruction as the world’s reserve currency. But the Dollar is too important to global liquidity right now to simply disappear overnight.

The US Dollar may experience a reprieve, in fact, if only because so many people own it and do not want to see their Dollars devalued. Developing countries, while gaining exposure to the strong euro, still prefer the Dollar. And then there’s China.With one trillion Dollars in foreign currency reserves (most of them US greenbacks) the Chinese have about a trillion reasons to fear inflation in the Dollar. This erodes their purchasing power. But maybe 2007 is setting up quite nicely for the Chinese, after all.If the Dollar rallies, this will lead to falling or at least more stable commodity prices.

The Chinese can then carefully go on a global resource shopping spree (as they have for the last three years) trading stronger paper Dollars for temporarily weak real assets – oil, gas, minerals, factories, capital...At least that’s how we’d play it if were running China’s economy. We’re not. But it makes sense to us. Make sense to you?It will take not only a lot of creeping inflation before the Dollar falls. It will also need the bursting of the derivatives bubble. Every New Era needs a new set of laws or commandments that can be proclaimed before the world. Moore’s law...love one another as I have loved you...and in the ear of "New Monetarism"...anything can become an asset as longer as there is an investor willing to buy it.

The New Monetarism is a theory of Independent Strategy in London. Their research shows what they believe to be the cause of the continued demand for Dollars in global asset markets...and why the economic imbalances that grab ink (American fiscal and federal deficits, trade deficits, current account deficits) don’t seem to fundamentally alter the demand for Dollars.That’s because the volume of Dollar-denominated transactions in the asset markets – a volume which only the Dollar, with help from the Euro and the Yen, can accommodate – dwarfs the Dollar volume of economic imbalances in the real global economy.

This clarifies just what is going on with Dollar demand and shows both that it can last a lot longer and that when it ultimately fails, the failure will be greater. It’s all here in this chart...Globally, derivatives now account for 75% of liquidity...some 802% of global GDP. Next comes scrutinized debt at 13% of liquidity and 142% of world GDP. Then broad money supply, at 11% and 122%, and finally central bank money at 10% of global GDP and just 1% of liquidity.That doesn’t mean the central banks have totally lost control. They could raise the cost of capital above the natural rate of interest...and kill off the speculation that’s led to an explosion in speculation.

But as pseudo-public officials with questionable independence from elected officials, how willing will central bankers be to raise interest rates on millions of deeply indebted borrowers (home-owners)? Not very, we predict.What’s behind this demand for ‘asset money’? We think it’s the Baby Boomers who need inflating asset prices to increase their net worth before retirement. Thus, the creation of new asset classes is a function of automatic liquidity into the stock market from Asian savers (and institutional money from pension funds, insurance companies etc.) looking for a home in new assets that can make everyone rich.Or in simple supply/demand terms, demographics has created a demand for financial assets.

Asian savings and cheap credit have created the supply of liquidity. Wall Street, the hedge funds, and private equity have rented a room in which the whole affair can be consummated, for a $23 billion clip of the ticket.Because the demand for ‘asset money’ is so high, says Australia's Financial Review, “almost everything today can become an asset class, whether a freeway, an aircraft lease, or royalties from David Bowie’s back catalogue. All that’s needed is for someone to work out the rocket science of how to construct a security and convince investors to buy it.

Recent history shows investors will buy almost anything.”How long can this party go on? Well, a lot longer. Governments are showing an increasing interest in adopting Australia’s superannuation model which directs private savings directly into the stock market. It’s mandatory, it supports liquidity in the stock market, in inflates pension values, and it keeps everyone in the money shuffling industry happy.Something like this could soon happen in the US now the new Congress has met in Washington.

The United Kingdom already has an official report advising mandatory investment in the stock market by employees, made straight from their pay packets – just like PAYE, and with the same accounting burden thrown onto employers.The idea of making everyone a millionaire through inflating asset values in the stock market is, of course, absurd. But that doesn’t mean it won’t be tried. And that’s why the demand for Dollar-denominated assets could support the US Dollar for a lot longer.

What’s more, it may not be long before Europe’s central banks (led by a Frenchman) begin to sell Euros to weaken that currency and strengthen the continent’s exports.A Dollar bull goring spectators at the bullring? Don't count against it.
Dan Denning, 05 Jan '07

Five Reasons the Pullback might Continue

From the Desk of Adreain Ash

Gold rose above $610 in Asia today after hitting a one-month low of $601 per ounce in New York late Friday. It's since slipped back again as the European session began.Why has gold dropped so hard, losing a massive 5% inside one week? “It looks like we’re going to have that soft landing we’ve all been hoping for,” said an adviser to US President Bush on Friday.


The latest employment data, he said – showing 167,000 extra non-farm jobs in Dec. versus 100,000 forecast – proves the Fed had “gotten it right”.For now, currency traders and hedge funds agree. The Dollar rose strongly on the jobs data, pushing the Euro back to $1.2989. Sterling has dropped 2.6% against the Dollar since this time last month."If you want to blame something, you can say a sliding oil price and currencies such as Sterling have put a negative sentiment on gold," one Singapore gold dealer told Reuters this morning. "However, support can be seen at around $600.""I am not worried about the sell-off. It's only the hedge funds playing the market.

Even if we have a quick dip to $599.10, I think it's all fine."The drop in Sterling and the Euro has capped losses in gold for British and Eurozone at 3.1% each. And as CommoditySeasonals.com points out, January normally proves a bad time of year for gold prices. Physical demand tends to decline as jewelers find themselves with Christmas and New Year inventory left over."There's a little bit of [physical] buying because of the lower price," says a dealing office at the Bank of China in Hong Kong today. "On the whole, there is some interest in Asia."

He sees support at $602, with resistance around $609 per ounce.More evidence that contrary-minded investors should expect the pullback to continue also comes from the stock market. London's FTSE100 hit new five-and-half year highs last week, but dropped sharply as mining and energy stocks fell alongside metals and oil. "Almost 25 per cent of FTSE 100 companies are metal/mining or energy related," notes Clive McDonnell, chief European equity strategist at Standard & Poor’s. "Conversely, the [German] Dax is the best hedge against falling commodity prices as it has no direct exposure to metals/mining or energy."Stocks in mining companies look vulnerable thanks to their own strategy, too. "Mining companies, pumped up by the resources boom, are choosing to step out without their usual protection," reports Mandi Zonneveldt for the Herald Sun in Sydney, Australia.

The switch to de-hedging has been fastest amongst gold producers, if only because they had the largest hedge books to unwind. Last spring saw unwinding by the world's largest gold miner, Barrick, just as the price shot to a 26-year high. Now that gold producers are more exposed to rising prices, they're also more vulnerable to any setbacks."The hedge impact of the global book - the measure used by The Hedge Book - has fallen from 52.6 million ounces to 41 million ounces in the past nine months," says Zonneveldt, meaning that forward sales have dropped sharply. "At the same time, the gold price has doubled."Australian producer Newcrest said in November it would defer 1.6 million ounces of gold into set-price contracts. That raised its exposure to the gold price.

But such confidence in gold's bull market – after 20 years of declining prices and increased hedging by gold producers – comes just as Wall Street says the commodity bull market has peaked.“The super-cycle theory of commodity markets is all about constraints on the supply side," says Stephen Roach, chief global economist at Morgan Stanley. "[But] likely demand shortfalls in China and the US could be equally telling."Charles Dumas of Lombard Street Research in London says the commodity bubble appears to have burst. Clive Donnell at S&P Europe says a bear market has begun.

Then there's the falling oil price. A key reason for investors to buy gold – often seen as the ultimate inflation protection – since 2003, "falling crude will [now] take its toll on gold," said Ranjit Rathod, director of India's MNC Bullion to Bloomberg this morning. "The whole mood is bearish with base metals being thrashed badly."Has the gold market really turned? "The Dollar is in a consolidation mode as opposed to a trend change in my view, and I see it resuming its decline," reckons one US commodities analyst. "Funds are not bailing these markets out and have gotten short.

I see a gold rally down the line, but it may take a week or so. We are advising clients to maintain a 75% long commitment in gold."While non-US investors may choose to follow the gold price in their own local currency right now – and buy at near 12-month lows – the US Dollar is sure to make headlines in the commodity markets as January unfolds. And whatever happens to gold, the sudden recovery of the US Dollar could become a big theme in 2007.

Friday 5 January 2007

Stockmarket, Debt Mountain and Real Estate Worries?


I hope that you have enjoyed the new year celebrations and are now looking forward to what lies ahead in 2007.

Unfortunately, I am not very optimistic at all about the signs, I do see similarity with 1987 when I was in the investment business, as an experienced mid 30's player. We could do no wrong, stocks, shares and real estate values were all rising.

All the writers at the time were predicting continued growth, increased stock market performance and benefits for all. There were a few "doubters" but these were ignored as we all basked in success and increased wealth.

But we were all proved wrong, the young never want to learn from the older and wiser folk who know that for every boom there follows a bust. We just couldn't help ourselves with our graphs showing a "never ending" upward trend.

Now I see lots of similarity, I expect the people who lived through the 1929 crash, or who have studied it in detail will say the same. There is too much confidence and too much evidence of severe financial problems.

Look at how much debt there is in the USA and the UK, its unsustainable, but all supported on property values by a banking system desperate to lend more and more money so that they can keep their shareholders happy with endless growth!

In the late 1980's this is precisely what toppled Japan and their Banking system. Property has its own cycle, I am am firmly of the belief that this has already topped out in 2005!

Then we have the "wall of money" theory, which states that all the investments have to be invested in "something". But with blind panic that follows a crash investors just want out, at any price, even a loss. After all they have made some profits in the past. But they either bail, or hang on. Both loose.


But this time around we have Derivatives. This will magnify loses and create further debt and subsequent bankruptcy. When this happens we may well get a 1929 scenario.

So why am I telling you this when I should be building excitement? Well there are defences to a stock market and property crash. Its Gold Bullion, not gold dollar derivatives but real Bullion.

Check out my own federal reserve system at
Bullion Vault

This allows the switching between currency and solid gold based in London, New York and Zurich. Get an account now.

In addition, I am in negotiation with a far eastern country who will be able to trade in solid gold and allow deposits of solid gold which will attract a rate of interest, plus any future rise in the value of Gold. And there will be rise in value when the stock crash comes. This will become available within the next month or so.

So for now heed my worries. It may not happen now, or in the next week, but it is coming. All markets are too high, too many currencies are too high, and advisers are still wanting you to invest.
So have a think, see the signs for yourself and act.

Gold Price Movements 5th Jan (Part 2)

As promised Adrian Ash is still talking about the odd price movements in Gold see Bullion Vault
Brought to you by John C Burke, Watersons Marketing Group


Ok so back to Adrian;

Gold sank in US trading after the much-anticipated US jobs report came in well ahead of Wall Street's expectations.

Gold dropped to $609 per ounce at the PM Fix in London. It was marked at $625 only four hours earlier. Technical analysts had cited $620 as key support.

"You're getting liquidation on the back of the strengthening Dollar," said Michael Guido, director of hedge-fund marketing at Societe Generale in New York to Bloomberg. "Obviously this number is a big surprise."

The Labor Dept. said at 13:30 GMT on Friday that the US economy added 167,000 jobs in Dec. Economists had been expecting nearer 100,000. The data also showed average US wages rising by 0.5% against 0.3% as expected.

A cut in US interest rates any time soon now looks unlikely – and that has sent the US Dollar higher across the board. But gold's sharp losses also extend to Sterling, Euro and Yen investors.

Gold has now lost nearly £10 per ounce for British investors.

French and German buyers are offered a €13 discount from this time last week.
"Right now investors are cautious about stepping into gold given this week's Dollar strength," says David Holmes, director of precious metals sales at Dresdner Kleinwort in London. Yet retail investors are sticking with it, according to data from the gold ETFs.

Exchange Traded Gold says it's holding 18.142 million ounces of gold today, barely changed from last week after a 3.3% rise in volume during Dec.
So if it's not retail investors selling out, who's dumping gold?

Gold has fallen $22 this week, a 3.5% drop. The US Dollar, meantime, has risen only 1.4% on a trade-weighted basis. And news earlier this week that a major European central bank bought gold – instead of selling it – at the end of Dec. has signally failed to support the market.

"For the clueless out there who still don’t understand," said an email to BullionVault on Thursday, "the gold market is managed by a Gold Cartel...Free markets do not trade this way."

Oh yeah? No one ever pretended the gold market was free or transparent. Central banks, after all, hold more gold than anyone else. Why act surprised if they try to rig prices?

Nor is gold a free ride to easy gains, either. Its volatility since the start of 2006 has wildly outstripped the volatility of US equities, for instance. And all this while, the global market turns over 1,500 tonnes every day or more.


If the world's central banks have indeed lent and loaned 3,000 tonnes into the market, as some conspiracists claim, they're up against a huge international market that's fragmented, volatile and opaque.

And whatever they might be up to in the spot market for gold, central bankers are doing all they can to send its price soaring in future.

Well, as I announced last night Gold is the place to be, just look at what Adrian Ash writes about the Stockmarket and Derivatives at
Bullion Vault

Gold Bullion-for Your Own Safety?

As I alerted most of you only yesterday something is happening to the price of Gold. This article from Adrian Ash at Bullion Vault is the first of 2 articles.
The second will follow shortly as it explains the unexpected fall in the price of Gold today (5th Jan) and points the finger at manipulation prior to a future jump in the price.
John C Burke 10:00 pm London (5/1/07) see
Bullion Vault charts and commentary

Has a major central bank done just as Bullion Vault wondered they might before Christmas...and started buying gold instead of selling it?

"Euro-banks have bought gold before," reports The Telegraph in London, "but past purchases involved coins under a scheme run by the Greek national bank...The latest purchase refers to bullion reserves, suggesting one of the euro-zone banks may have broken ranks."

This mystery buyer amongst Europe's big central banks turned up in the gold market at the end of December, it seems. Their purchase amounted to around two tonnes of gold.

But not so fast, replies a spokesman for the ECB. He claims that the purchase was purely for "technical reasons".

"We would be cautious about this," adds Nikos Kavalis, an analyst at the GFMS Ltd consultancy in London. "These [central] banks have a duty to uphold monetary stability. They're not hedge funds."

Central banks buying gold

What would it matter if a central bank was indeed buying gold?
After all, central banks in Asia, flush with US Dollars in exchange for all the cheap goods they ship across the Pacific each day, have been buying gold. So too have several oil-producing nations. Russia's official data says it grew its gold holding by 2.2% in 2006. Unofficially, many analysts believe secret gold purchases by Asian and oil-rich central banks to be much larger.

But a member of the European Central Bank actively buying gold?
That would really mean something big. The Washington Agreement of 1999 capped gold sales at 500 tonnes per year. It aimed to stop central banks dumping the 'barbarous relic' en masse in exchange for each other's paper promises, if only to give Britain a clear run at selling 400 tonnes of gold from the UK's reserves.

Should a major European bank now swap Dollars or Euros for gold, it would start a flight out of paper currency and into gold by other investors too – exactly what central bankers don't want.It would undermine the validity of the paper money they issue for a living!

"This has the gold market abuzz," notes Dennis Gartman, editor of the eponymous Gartman Letter. "[Gold is] becoming a flight-to-safety instrument once again," adds Kevin Kerr, co-editor of Outstanding Investments, "as more and more uncertainty builds with Iran and just what global economic impact it will have."

Central banks' current gold reserves

Let's remember, however, that two tonnes is not very much gold at all – not in the bigger scheme of things. Worldwide, central banks are estimated to hold some 30,000 tonnes. The gold-backed equities such as GLD in New York and Lxyor GBS in London now have around 750 tonnes between them.

What's more, demand from jewelers makes up the vast part of the annual gold market, some 592 tonnes in the summer of 2006 according to GFMS data. Jewelry demand accounted for 72% of total gold demand between July and September.

Next comes industrial & dental demand. It totaled 114 tonnes in the third quarter of last year. Investment demand over that period – or rather, investment demand identified by GFMS – came in at 110 tonnes.

So a two-tonne purchase really is peanuts compared to the total market. After just 18 months of operation,
Bullion Vault 's clients already hold more than that between them. And given gold's price in December, this mystery buyer amongst the European central banks spent a mere $50 million.

To put that in perspective, it would cover barely 6 hours of The United States' ongoing trade deficit!

But something certainly is afoot in the gold market, we believe. Just this week, a leading gold analyst in Mumbai, India, forecast gold in 2007 will rise above $850 per ounce, its previous all-time high for US Dollar investors.

Central bank gold sales and producer hedging

Speaking at an investment conference on Wednesday, Si Kannan, head of research at Sharekhan Commodities, said that the lack of growth in gold mining supply – plus the launch of new exchange-traded gold funds (ETFs) for Indian investors early this year – could send the price soaring.

India is already the world's largest market for gold jewelry.
Its consumers bought one ounce in every five sold for personal adornment worldwide last year. And India's retail investment demand leapt 31% higher in tonnage terms in the third quarter of 2006. In cash terms, Indian investors spent an extra 49% on gold. But as yet, Indian investors face the same problems in accessing gold investment direct as did US and European investors before 2005.

"The launch of the [Indian] gold exchange-traded funds in the first quarter will skew the price curve upward," Kannan says.
(
Bullion Vault would of course offer Indian investors a better price, with greater security and for lower dealing costs.)

Central bank buying could also become a big factor in driving investment demand for gold higher, as
Bullion Vault reported before Christmas. “Our studies indicate ," said Credit Suisse in a note of 13 Nov. 2006, "that gold supply in the long term is inexorably falling behind demand as the diminishing number of new reserves fails to compensate for dying mines. This has been happening for some time but, until recently, the effect has been masked by Central Bank sales and producer hedging.

Central banks to become net buyers of gold?

"However, Central Bank sales will likely whither, and Banks could become net buyers of gold. This transition, together with expected increased investment demand, jewelry consumption and diminishing mine supply, will be when the supply-demand imbalance heats up the gold price. We believe this has already begun."

Structural shifts in the make-up of the global gold market had A huge impact on gold prices in 2006. Dehedging by the big gold mining companies coincided with the spike to $730/oz in mid-May. It came just as Barrick Gold Corp. was buying back 3.0 million ounces it had sold forward. AngloGold Ashanti Limited squared up 1.0 million ounces of its hedge book last spring, and Newcrest Mining was also trying to buy back a "sizeable amount"
According to analysis in the Mitsui Report.

So while gold is getting hosed right now, the current set-back in gold prices may well come to look like a last chance to buy before the next leg of this bull market begins.

Gold's now trading below $630/oz according to the free gold charts here at
Bullion Vault .
For Sterling and Euro investors, it's almost back where it started last year.

If you've ever loved a bargain in the New Year sales, you might just come to love gold at today's prices.

Adrian Ash, 04 Jan '07

Adrian Ash is head of research at
Bullion Vault , the fastest growing gold bullion service online.
Formerly head of editorial at Fleet Street Publications Ltd – the UK's leading publishers of investment advice for private investors –he is also City correspondent for The Daily Reckoning in London, –and a regular contributor to MoneyWeek magazine.