Gold Prices: Hedging your bets

Posted May 15, 2008

“That key marker of investor anxiety, the gold price, fell 15 percent from its top of mid-March to the end of April. The preceding surge had taken gold bullion up from $650 per ounce in August to above $1,030 the day after Bear Stearns was sold to J.P. Morgan.” — Adrian Ash

by Adrian Ash

Baltimore – (TFN): A little less than 12 months ago, the world’s biggest financial players suddenly found they could not turn some $1.3 trillion of their assets into cash.

These assets — bonds backed by U.S. homebuyers with low (or no) incomes — had become utterly illiquid. No one would buy or lend against them, not at any price. And an asset you can’t sell or borrow against is worth precisely nothing.

The resulting mayhem? It would have sounded frivolous two years ago. But the subprime crisis caused the first run on a British bank in 130 years, a forced collapse in U.S. interest rates, and the fire sale of Wall Street’s fifth largest investment bank for just 16 cents on the dollar.

“[Now] it seems that the financial system is slowly working its way through this subprime shock,” writes Gillian Tett in the Financial Times. “The largest banks and institutions have written off almost $200 billion and raised more than $100bn-odd of capital to plug this gap. “Indeed, the writedowns have been so vast that some analysts expect to see some write ups in the next set of results.”

Crisis over? That key marker of investor anxiety, gold prices, fell 15 percent from their top of mid-March to the end of April. The preceding surge had taken gold bullion up from $650 per ounce in August to above $1,030 the day after Bear Stearns was sold to JPMorgan. Read on to learn the cause of gold’s recent tumble.

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