Global economy woes may add glitter to gold

It was yet another week of relative weakness for gold. The yellow metal opened the week at $798 an ounce and spent almost entire week in the $795-810 band, posting an intra-day high of $817 on Wednesday and low of $787.60 on Friday.

But, the week was remarkable for a number of reasons. First, it saw the last Fed rate cut for 2007. The 25 basis points cut in the federal funds rate to 4.25%, the third reduction this calendar, was a bit disappointing for the market, which was hoping for a 50 bps cut.

On the other hand, the US housing industry woes continued. The National Association of Realtors came out with yet another none-too-encouraging report. According to it, the purchases of new homes will fall to 6,93,000 from 7,88,000 this year. Purchases dropped 7.8% in the South and 1.4% in the Midwest.

The number of Americans who fell behind on their mortgage payments rose in the third quarter to a 20-year high, the Mortgage Bankers Association said last week.

The share of all home loans with payments more than 30 days late rose to a seasonally adjusted 5.59%. The gains in September and October follow the biggest back-to-back drop since records began in 2001.

The woes continued not just for the US housing industry but the economy as a whole. The US trade deficit widened in October as the value of imported crude oil rose to a record. The gap grew 1.2% to $57.8 billion from a revised $57.1 billion in September. Excluding petroleum, the imbalance was the smallest since 2004.

A weaker dollar and growing economies abroad have propelled demand for American-made goods to a record for eight consecutive months. However, the price of imported petroleum rose to a record average $72.49 a barrel in October.

The picture of the global economy also seemed fragile. The Federal Reserve said it would add liquidity to the US banking system, boosting the appeal of the precious metal as hedge against inflation.

The Fed said it will provide $24 billion in currency swap lines to European and Swiss central banks as part of a plan to address demand for cash after the subprime-mortgage crisis sparked higher borrowing costs. Policymakers in the US, UK, Canada, Switzerland and the euro region also agreed to coordinate attempts to ease the credit drought.

Yet another sign of stress in the global financial system was seen from the fact that interest rates on loans in euros were at a seven-year high, a day after central banks in Europe and North America teamed up in an attempt to end gridlock in money markets.

Three-month borrowing costs held at 4.95%, according to a British Bankers’ Association report. That was 95 basis points more than the European Central Bank’s benchmark interest rate, compared with 57 basis points a month ago.

Rates, at their highest since December 2000, were ample proof that the first coordinated central bank action since 9/11 was not sufficient to revive inter-bank lending.

These phenomena are pointers that all is not well with the global economy, leave alone the US economy. And precious metals are bound to flourish in an environment like this.

This week may see a sideways movement in gold and the prices may even soften, given the fact that technical indicators are signaling a softer trend.

However, long-term buyers need not be deterred by this. They, in fact, have yet another opportunity to fill their bags.

The writer is managing editor, www.commodityresearch.in.

He can be reached at editor@commodityresearch.in.