Banking crisis: Investors pile into gold and bonds
Mark Tran | September 18, 2008
As the world’s central banks pumped billions of dollars into the markets in a bid to restore confidence, investors were piling into gold and government bonds, traditionally safe havens at times of financial turmoil.
Although the FTSE 100 showed signs of steadying after Lloyds TSB announced its bid for HBOS, demand for safe-haven assets was still high. Gold rose as much as 3% to a more than six-week high, extending its biggest ever one-day rise as investors rushed to the safety of bullion in what Alan Greenspan, the former head of the US Federal Reserve, called a “once in a century” financial crisis.
Spot gold rose 1.1%, or $9.60, to $872.30 an ounce from its close in New York yesterday, when it surged more than 10% or nearly $90, exceeding the previous biggest one-day gain in 1980. At one point gold jumped more than 3% to as high as $892.10 an ounce – the highest since August 5 – with a burst of demand from Japanese investors.
“This is stunning, and testimony to these historic times,” Alan Ruskin, chief international strategist with RBS Greenwich Capital, said in a note. “It is clear that fear and a desperate search for a hedge against risk has trumped all.”
Gold has now more than tripled since Gordon Brown ordered the Bank of England to start selling half of Britain’s bullion reserves. The first auction in 1999 was at $254 an ounce, the absolute bottom of a 21-year bear market. The total losses for the British taxpayer caused by these sales now amount to well over £3bn, even after adjusting for returns on alternative dollar, yen and euro bonds.
GFMS, a precious metals consultancy, said in a report that investment demand was expected to drive gold prices “well above” $900 an ounce in the fourth quarter as the dollar slips and the outlook for the financial sector worsens.
In the US, the 73-year-old investment bank Morgan Stanley became the latest financial powerhouse to be buffeted by the financial crisis. Reports suggested that Morgan Stanley might ally itself with the North Carolina-based high street banking group Wachovia so it could have access to retail deposits as an extra source of capital.
But the flight into gold poses its own risks if the price is shooting up too fast. The sharp rise may not last as it takes just a few buyers to send them moving in either direction.
“Gold sentiment has clearly turned bullish and $900 is in the market’s sight, but the speed of the rise is too fast,” Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo, told Reuters.
As stockmarkets took a beating investors piled into short-term US treasury bonds, pushing yields down close to zero, which meant investors were prepared to earn nothing on their assets provided that they were safe from plunging markets.
“Credit fears have now reached a climax. It’s presumptuous to assume it would end in one day,” said Harushige Kobayashi, head of research department at broker Securities Japan. “The market ignores fundamentals and is now 95% driven by psychological factors.”
In other signs of the panic that has gripped markets, the Chicago Board Options Exchange Volatility Index, Wall Street’s main barometer of investor fear, had its highest close in almost six years yesterday.