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Gold: Why Asia was spot on

Just as people who study oil prices look too much at the New York and London spot price, those who study gold prices look too much at the New York spot price and the twice-daily London fixes. Wednesday's phenomenal rise in the price of gold in New York was presaged in Asia. The day before, the spot price rose US$20 in Asian markets as investors dumping stocks began to shift to gold as a safe haven.

Hong Kong and Sydney are the two gold trade centers in Asia. Both in India and in China, the upper-middle and rising-middle classes want the same glittery consumer accoutrements (watches, jewelry and the like) that their Western counterparts have long enjoyed. And Mumbai is also important because of the seasonal Indian market related to wedding calendars.

The Australian spot market opens in the early evening New York time and overlaps with the opening hours in Hong Kong, which is the center of gold trading in the Far East and Southeast Asia. The end of the Hong Kong day overlaps with the beginning of trading in London, which in turn overlaps with New York. So there is nearly the 24-hour possibility to trade gold on one exchange or another. And the electronic New York Globex is open almost all the hours when the NYMEX is closed.

Nevertheless, the take-off in the gold price on Wednesday was keyed at the 9:30am opening of the New York equity markets rather than the 8am opening of the commodity exchange, this in the wake of the weekend's carnage followed by the US government's effective socialization of the private insurance firm AIG.

Another element in the mix is a little-mentioned report released a week ago by the US regulator of commodities markets, the Commodities Futures Trading Commission, according to which some sovereign wealth funds, which together accounted for about 9% of the $200 billion invested in all commodities indices at the end of June, bought gold to hedge against the dollar.

This can only complicate things even if there is no "conspiracy" against the dollar (although listening to the leaders of some countries, one might wonder).

The exchange-traded fund on the American Stock Exchange that tracks the gold price in New York, which has become the vehicle of choice for many investors, conducted its average daily volume in the first hour of trading on Wednesday. Brokers opined that this move represented the re-entry of those traders, investors and speculators whose exit caused the price to collapse a few months ago.

Anecdotal evidence from commodities dealers selling physical gold coins would seem to substantiate this. A few calls to buy by widely-listened-to popular electronic newsletters could have been enough to trigger the rush. Almost the day's entire advance was accomplished by the time the NYMEX closed in early afternoon, and much of that was finished in the first two hours of trading.

A Financial Times blog correctly stated that this was "a flight to safety of the kind not seen since the Second World War". The US dollar was down 1.2% against a basket of major currencies, but oil recovered and gold had its largest gain ever in absolute dollar terms, closing at $866 per ounce.

The spot price then held steady around $860 per ounce until Hong Kong opened on Thursday morning in Asia, although it had risen in Sydney to $880 by then. In the first hour in Hong Kong, the price spiked again, this time to over $890 before falling back to $860, around which it has since oscillated, although moving up to $870 in the late afternoon.

Silver was even more remarkable, gaining over 14% on the day as its spot price took off earlier (in fact it began to rise before dawn in New York, not long after Hong Kong closed but while London was still open) and continued its rise in the New York afternoon trading while gold cooled off.

Silver reached $12.00 per ounce by 2pm then followed gold's pattern: beginning to rise in Sydney in anticipation of the open in Hong Kong, where it spiked soon after (in silver's case, to $12.50) before falling back to the $12.00 level or actually a bit below but steady.

The Russian exchanges were hammered worse and worse at the end of last week and beginning of this week, as panic selling led to margin calls, leading to forced liquidations in a vicious circle. (For background, see Georgia invasion worsens Russian downturn, 22 August 2008; and Russian equity flight accelerates, 11 September 2008.)

According to one astounding rumor from a usually credible source, Russia had plans not so long ago to peg the ruble officially to gold but decided not to do so, at least for the time being. Perhaps that is a good thing. The country's banking system froze on Tuesday due to a mid-size default involving brokerage firm KIT Finance, and the $60 billion that the government tried to pump into the financial system could not get through. The leading RTS and MICEX exchanges in Moscow have been closed since early on Wednesday until further notice.

In New York, the game of musical chairs continues, and while those responsible for the carnage will probably not die broken in the gutter after crashing from their seats, they seem no longer to be receiving golden parachutes as they are kicked out the door.

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URL:  http://www.robertcutler.org/blog/2008/09/gold_why_asia_was_spot_on.html
First published in Asia Times Online, 19 September 2008.

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