Financial Market

The price of Gold today reached a new all time high when it was traded at $914 an ounce, up on the $866 high mentioned on Financial Market on the 3rd January.

With continued safe haven buying as investors seek a protection from looming recession in the US Gold has continued to set all time trading highs.

A continued weak Dollar has continued to boost the metal as foreign currency investors look to take advantage of their strong position in world trading. This time however it was other precious metals that were also recording all time trading highs for themselves, with Platinum also trading at $1,587 an ounce, and silver hitting a 27 year high of $16.58.

Precious metals are surging after the collapse of high risk sub-prime home loans market spurred a global credit crunch. Now investors are looking for investments with a perceived lower risk.

The World Bank released its Global Economic Prospects report for 2008 today, in which it predicts 2008 will be a year that developing countries will play a crucial role in preventing global markets suffering heavy landings as they suffer slowing economic growth at a time when the credit crunch continues to hit world economies.

In the report the World Bank has stated that the resilience in developing economies such as China and India will help to soften the impact of the current economic slowdown, and lead world markets in terms of growth in 2008.

The report from the World Bank was reiterated by Lord Jones who has encouraged medium sized British firms to actively look for opportunities in these high growth markets.

The prediction of a weakened landing however could be threatened by a continued weakened dollar and increasing volatility in world markets.

‘External demand for the products of developing countries could weaken much more sharply and commodity prices could decline if the faltering US housing market or further financial turmoil were to push the United States into a recession,’ World Bank

2008 growth predictions
The report outlines that slowed world economic will slow to 3.3% in 2008, from 3.6% in 2007. The growth of developing countries however is projected at 7.1% for 2008. US specific growth is tipped to slower even more to 1% in the first half of 2008, whilst China is tipped to record more than 10% growth.

‘strong spending by oil-exporting countries and firm expansion in China and India will keep developing country growth at 7% or more this year and next.’ World Bank

Oil this week traded at the $100 barrel barrier for the first time on Wednesday, marking an important market milestone.

Spurred on by recent unrest in Nigeria, Algeria and Pakistan, coupled with a weakening US dollar and cold weather warnings, the record high price of oil is wake up call of things to come in the New Year.

On Wednesday it was light sweet crude rose $4.02 to $100 a barrel in New York, prompting a drop in shares and a surge in gold prices.

On the back of the price rises the UK saw record petrol prices at the pumps at an average high of 103.3p, beating the previous high of 102.92p set on Boxing Day.

After Wednesdays $100 high, oil prices did ease today dipping to 99.61 dollars per barrel.

The oil high comes at a time when many central banks are trying to cut interest rates in order to stimulate growth, and with this new high there are increasing concerns that rising oil prices will stoke inflation. Increased inflation brought about by increasing oil prices will result in central banks being unable to make the necessary rate cuts to boost flagging economies, bringing the threat of recession closer.

Market experts have said that continuing demand for oil without an increased supply will only see this price increase further adding to the woes of oil producing economies.

The oil-producers’ cartel OPEC has blamed speculators for the high price of crude, stating that there is plenty of the fuel in the market to meet the demand of consumers.

Oil traders are due to meet OPEC in Vienna on February 1st, but after rejecting proposals for any increase in production in December blaming rising oil prices on industry speculators, any rise in production looks an unlikely solution.

Although unrest in oil producing countries is certainly playing a significant role in the rising cost of oil, some market analysts have also identified increasing demand from China and India as a significant factor.

Oil prices however also continue to get support from a weakening dollar, and additional fears remain ahead of the US Department of Energy’s weekly report on energy stockpiles due today. If the report confirms a seventh consecutive weekly fall in crude oil reserves, oil prices could well break Wednesdays $100 per barrel high.

Last week ending December 21, the US Department of Energy reported crude oil fell 3.3 million to 293.6 million barrels of reserve crude oil, a sixth consecutive fall.

Over the past five years crude prices have quadrupled, and after staving of the $100 per barrel mark in 2007, experts are already predicting a $120 per barrel high in 2008 and news of further falling stock piles later toady will certainly send prices closer to this figure.

The price of gold passed a 28 year high of 850 dollars an ounce today following unrest in Pakistan and political turmoil in Kenya fuelled demand for the precious metal.

The current price of gold which hit $866.53 on the London Bullion Market, which although in part been contributed towards by the declining dollar which fell against the Euro again today, is as a result of demand brought on by safe haven buying.

The relationship between political unrest and an increased interest in gold is nothing new, and in troubled times gold is often seen as a safe haven for protecting investment funds from the impacts of inflation seen with stock and share investments.

Historically gold has not seen the rises of in 2007 (up 30%) since 1979, when the Iranian revolution crippled crude oil exports and US inflation hit 13%.

The rises in gold have come as record oil prices have been gradually driving up inflation, and supplies from South Africa, the world’s biggest producer, have dropped to the lowest in 84 years.

The demand for the metal has also has arisen due to heavy losses in credit markets which have spurred demand for alternatives to stocks and bonds. With the dollars drop investor interest in dollar-priced commodities is growing as they become cheaper for buyers using stronger currencies.

“Investors are worried about the oil prices and the weak dollar. When the situation is unstable, they invest their money elsewhere and this has boosted buying interest in gold” - Gary Yue, a gold dealer at Delta Asia Financial Group.

Also a factor in the rise of the price of gold, according to the World Gold Council, is the increased volume of jewellery purchases in emerging economic powerhouses China and India.

Gold is tipped to continue to increase in value over the coming months. Amongst the aforementioned reasons for the precious metals popularity, it believed many investors will continue to look at gold as a way of protecting reserve funds from acceleration inflation.

After news last week about the FED plans to inject liquidity into financial markets through a series of below market rate inter-bank loans totalling $20 million dollars, the European Central Bank has taken further steps pumping a record 348.6 billion Euros ($502 billion) into financial markets.

The emergency move follows last weeks co-ordinated action, and resulted in short term markets rate reducing at the quickest rate for ten years on Tuesday 18th December. The amount invested by the ECB was twice the amount first indicated, and came as a result of 390 private sector banks in the eurozone requesting the emergency funds.

The funds were offered for two weeks to boost liquidity in financial markets at a rate of 4.21%, short of previous market rates and with the intention of easing tightened credit markets. The loosening of those markets will then relieve fears of a Christmas period meltdown, a time of year when banks in particular need more cash to balance increased retails spending.

The loans made available by the ECB are 25 times larger than those the Bank of England previously made available, through a series of three month credits at 5.95% totalling £10 billion.

With the ECB making funds available to banks over a short term period, the aim is that these funds will be passed onto companies and individuals at cheaper rates. Indeed on news of the ECB’s actions the short term lending rate dropped, with the two week euro libor rate falling to 4.4%.

The fact that these short term cash funds were offered at 70 basis points less than the commercial cost of short term money sends out a clear message that things are so grim in the money markets that the ECB will do anything to unblock the system.

The offering of unlimited money at below market rates by the ECB through this immense cash injection is not a magic cure, but is more a step that will tide markets over the holiday period. It seems more an admission that central banks have failed to thaw freezing money markets of the last three months, and the problem still remains more about credit worries than market liquidity.