Fear
triggers gold shortage, drives US treasury yields below zero By Ambrose Evans-Pritchard
Last Updated: 9:26AM GMT 11 Dec 2008
The
investor search for a safe places to store wealth as the financial
crisis shakes faith in the system has caused extraordinary
moves in global markets over recent days, driving the yield
on 3-month US Treasuries below zero and causing a rush for
physical holdings of gold.
"It is sheer unmitigated
fear: even institutions are looking for mattresses to put
their money until the end of the year," said Marc Ostwald,
a bond expert at Insinger de Beaufort.
The rush for the safety of US Treasury debt
is playing havoc with America's $7 trillion "repo"
market used to manage liquidity. Fund managers are hoovering
up any safe asset they can find because they do not know what
the world will look like in January when normal business picks
up again. Three-month bills fell to minus 0.01pc on Tuesday,
implying that funds are paying the US government for protection.
"You know the US Treasury will give you
your money back, but your bank might not be there," said
Paul Ashworth, US economist for Capital Economics.
The gold markets have also been in turmoil.
Traders say it has become extremely hard to buy the physical
metal in the form of bars or coins. The market has moved into
"backwardation" for the first time, meaning that
futures contracts are now priced more cheaply than actual
bullion prices.
It appears that hedge funds in distress are
being forced to cash in profits on gold futures to cover losses
elsewhere or to meet redemptions by clients. But smaller retail
investors – and perhaps some big players – are
buying bullion in record volumes to store in vaults.
The latest data from the World Gold Council
shows that demand for coins, bars, and exchange traded funds
(ETFs) doubled in the third quarter to 382 tonnes compared
to a year earlier. This matches the entire set of gold auctions
by the Bank of England between 1999 and 2002.
Peter Hambro, head Peter Hambro Gold, said
the data reflects a "remarkable" shift in the structure
of the market. The rush to safety reflects a mix of fears
about the fragility of world finance and concerns that the
move towards zero interest rates could set off an inflationary
surge further down the road, and possibly call into question
the worth of some paper currencies.
The near paralysis in the "repo"
markets may prove to be no more than pre-Christmas jitters
as banks square their books.
However, there are some signs that extreme
monetary stimulus by the US Federal Reserve and other banks
is starting to have unintended consequences.
The Bank of Japan is it is reluctant to cut
its rates to zero again because of the damage this causes
to the money markets, which serve as a key lubricant of the
credit system. The US is now starting to face the same dilemma.