Gold Trading Higher as Complex, Risky Debt Booms
Tuesday, 12/10/2024 16:03
GOLD TRADING in London bullion saw the precious metal touch $2690 per Troy ounce for the first time in 2 weeks on Tuesday, hitting what was a new all-time high only 2 months ago as Western stock markets dipped and warnings grew over markets for higher-risk debt products reaching pre-financial crisis levels.
Silver earlier set its highest 12 noon fixing since 5 November above $31.90 per Troy ounce, while spot market trading saw the more industrially-useful precious metal pop through $32 for the 3rd time in 2 days.
That marked an 11-year high for
silver prices when reached this spring.
"If I was going to pick out one theme to describe 2024, it's the continued transition of activity to non-banks," said Bank of England deputy governor Dave Ramsden in
a speech on UK and global financial stability on Monday, saying that non-bank financial institutions (NBFIs) ranging from pension funds to insurance companies, hedge funds and money market funds have grown in size since
the global financial crisis of 2007-2012 and now account "for around half of the total assets in both the UK and global financial systems."
Demand for "complex" structured finance products has meantime hit its highest since 2007 – start of the global financial crisis – says the
Financial Times, citing data from trading exchange and data service LSEG and quoting Deutsche Bank's head of US asset-backed securities as
calling investor appetite "relentless".
In corporate debt markets, the extra yield demanded by buyers of investment-grade US bonds over US government debt last month fell to a 19-year low, while the spread on high-yield debt – meaning a credit rating below investment grade – hit a 17-year low.
That put the extra return demanded for lending to higher-risk corporates versus investment-grade borrowers at just 1.80% per annum, the smallest reward for additional credit risk since the all-time low beneath 1.5% hit in early summer 2007, just weeks before a global credit crunch marked the start of the global financial crisis.
"High interest rates and leverage have jeopardized borrowers' ability to service their debt," says the International Monetary Fund's
latest global financial stability report.
"[That is] exerting significant pressure on cash flows of private credit borrowers," says the IMF, with US business development companies – a type of unregistered, closed-end investment fund typically lending to small and medium-sized firms – now having to accept almost 9% of interest and dividend income from their borrowers in the form of new promises to pay, commonly known as 'payment in kind'.
"Tailwinds for gold exceed the headwinds," says analyst Rhona O'Connell at brokerage StoneX, pointing to "stresses in the banking system...notably in the small-to-medium sized sector, and especially exposure to property, and...Commercial Real Estate.
"The emergence of the Shadow Banking sector (ie, unregulated transactions)" is another tailwind for 'safe haven' gold, O'Connell says, calling it "reminiscent of the Sub-Prime issues in 2007 that led to the Global Financial Crisis in 2008."
As it is however, financial conditions in the USA started December at
the easiest in more than 3 years according to the Chicago Fed's national index, while financial stress – as tracked by the St.Louis Fed – is running
well below the past 5 years' average, albeit a little higher from this spring's 17-year low.
Stock-market volatility has meantime fallen sharply since start-August's spike in the VIX index –
when Tokyo raised Japanese interest rates above zero for the first time in 15 years, crushing the Topix index – easing back towards 2019's pre-Covid levels.
Trading above £2100 per ounce for UK investors today, the gold price for Euro investors also hit new 2-week highs at €2555, coming within 2.0% of November's all-time high.
"The Eurozone, so far, has shown resilience," said European Union commissioner Valdis Dombrovskis Monday, asserting that amid political chaos over France's budget deficits, "There are
no signs of a crisis."
Meantime in the Middle East, the HTS militia – still judged to be a 'terrorist' organization by most Western governments – appointed an interim prime minister in Damascus after overthrowing and forcing President Assad to flee Syria, where forces from neighbouring Israel, Turkey and also the US
continued separate bombing campaigns against separate groups to avoid "moments of promise [threatening to] descend into conflict and violence" according to Washington's secretary of state Antony Blinken.
"Geopolitical and economic uncertainty may help support precious metals," says a note from Japanese conglomerate Mitsubishi's head of business development and strategy for precious metals Jonathan Butler, "but overshadowing this are likely to be gains in the US equity and crypto markets in the short term" ahead of Donald Trump's inauguration next month.
"Longer term, if these markets turn into speculative bubbles there could be support for precious metals as risk hedges."
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