Sub-prime shake-out continues but could be positive for gold price

As the sub-prime fallout continues there is the likelihood that the overall US economy will be adversely affected leading to a fall in interest rates and corresponding decline in dollar value which should be positive for the dollar gold price.

LONDON - 

It is remarkable how interlinked these days the world's financial sector has become. While the US and its institutions will have borne the brunt of the sub-prime lending fiasco, there is no doubt too that others around the world will be scratching to preserve their financial integrity and some, no doubt, may fail to do so creating even more doom and gloom in the financial markets.

The latest to report problems in the market include China's second largest bank, the Bank of China, whose stock fell by over 5 percent yesterday, despite strong profit figures, on news of a reported $9.7 billion exposure to sub-prime loans.  This follows on news of problems faced by other Asian banks and some major European ones.

So far, though, there does not appear to have been particularly significant default levels from holders of sub-prime mortgages in the US, but the fear that these will grow as house prices continue to slump seems to have been the principal factor in the financial crisis which has materialised.  Confidence is everything in the financial world!

There is also a feeling in the US, most recently expressed by global investment bank Goldman Sachs, that the shakeout will adversely affect the overall US economy which will force the Fed to cut interest rates, which in turn may drive down the value of the dollar assuming European interest rates in particular are not cut at the same time.

If the dollar continues to decline against major world currencies, then the pattern that the dollar gold price moves counter to the world value of the dollar currency should re-boost the gold price momentum which has largely stalled this year, Central Bank sales notwithstanding. 

It does seem that the recent high levels of Central Bank sales in the final weeks of this year's Central Bank Gold Agreement have helped mitigate a sharp gold price increase which might have been expected to have resulted from the dollar weakness and market mayhem.  It seems unlikely that sales will continue at such a high level come the end of September when this year's CBGA sales quota terminates, which could give a final quarter boost to the metal price.  The market had not been anticipating the level of Central Bank sales over the past three months and it has to be positive for gold that the price has remained pretty constant given the high disposal levels absorbed.

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