Gold Proves Resilient Amidst Broker Panic

Gold prices dipped early in London on Friday after recovering yet another sharp fall sparked by a forced sale of stocks, bonds and mortgage-backed assets from heavily indebted fund managers.

Tokyo's Nikkei index closed the day 3.2% lower – and European stocks dropped more than 1% at the open – after Carlyle Group, the private equity giant, warned this morning that further margin calls from brokers serving its $27.4 billion Capital Corp. may "quickly deplete its liquidity and impair its capital".

Crude oil prices neared $106 per barrel as the US dollar sank to fresh record lows on the currency markets.

The Gold price in Euros rose 1.1% from Thursday's five-session low.

On Thursday, Carlyle Capital Corp. was served with a default notice by its creditors, sparking a panic 2.1% fall in the S&P index (SPY). The fund owes $28 for every $1 of its own money, according to the Financial Times.

The Telegraph here in London puts the fund's gearing at 32:1.

On Wednesday last week – when the Gold price dumped $33 per ounce, only to turn right around and hit a new all-time high – Carlyle Capital Corp. received more than $37 million in margin calls from its brokers.

Friday it said that its lenders have already sold off some of its mortgage-backed investments to recoup their cash.

At the opening in Zurich Friday, shares in UBS (UBS) – the world's largest wealth-management group – lost a further 1.8% after dropping 3.4% Thursday on claims that it dumped a $24.2 billion portfolio of higher-risk US mortgage bonds at knock-down prices.

A fire-sale looks "highly likely" according to Kia Abouhossein at J.P.Morgan. "We believe UBS would be willing to aggressively reduce structured credit assets to clean up the book."

Abouhossein thinks UBS sold its portfolio of "Alt-A" mortgage bonds – so-called "low doc" and "no doc" loans made to apparently prime-rated home buyers – for just 70¢ on the dollar.

UBS declined to comment. This week will mark the 12 month anniversary of a study from David Liu, head of mortgage credit research at UBS, which showed a four-fold jump in Alt-A delinquencies at the start of 2007.

"Losses could potentially wipe out most of the credit support on BBB- rated bonds backed by Alt-A hybrids," warned Liu one year ago. "And yet we have not seen any spread movements that suggest investors are taking this into consideration."

On Thursday, the Mortgage Bankers Association said US foreclosures rose to a record rate in the last three months of 2007, as subprime borrowers simply walked away from their homes and their debts.

"The risk of a systemic crisis is rising," says Nouriel Roubini at RGE Monitor Friday. "The markets are becoming utterly unhinged, the financial system is broken and everybody's in de-levering mode.''

"We had another meeting with a Prime Broker yesterday," confirmed the anonymous London hedge-fund manager Finbar Taggit in his blog Friday morning, "complaining why the terms of our lending have changed again.

"Despite the lenders owning the underlying collateral, they are nervous. Very nervous."

In the turmoil of fresh forced sales across the financial markets on Thursday, the spot Gold market dropped $26 to bounce off $966 per ounce. It then climbed 1.2% by the New York close and climbed again to reach $985 just before Friday's opening in London.

The Gold price then bounced again after a fresh wave of selling knocked it 0.8% lower Friday morning. But more remarkable than Gold's growing volatility has been the Gold market's failure to reverse or even pause in its six-month surge.

While the S&P stock index has lost 7.5% of its value, the price of Gold has gained between one-third and one-half against all major currencies – and it has continued to push higher even as leveraged speculators using borrowed money have been forced to reduce their positions by the growing brokers' panic.

From the record peak of mid-January, total betting on Gold futures and options contracts has fallen by more than one-sixth. But this falling "open interest" in Comex Gold contracts hasn't dented the underlying bull run in either futures or physical Gold prices.

Nor has it changed the shape of bullish and bearish betting inside the futures market. So-called commercial traders (refineries and fabricators) continued to hold one bullish contract for every three short positions throughout February. Professional speculators (meaning hedge funds and larger institutions) were 86% bullish

Private investors wanting the advantage of leverage – plus all the risks of margin calls and leveraged losses – remained 75% bullish on Gold last month.

The general Japanese public trading Gold futures on the Tocom exchange in Tokyo "continue to lock in profits" reports Mitsui – the precious metals dealer – this morning, "and have shed approx 565,000 ounces."

The Gold price in Japanese Yen was on track to end the week higher early Friday, however. It's gained almost 5% since this time last month.

"While the fundamentals continue to point to higher Gold prices," Mitsui continues, "a pullback is not out of the question.

"[But] any pullback in price may be short lived," the note concludes, "as Gold has proven its resilience quite often" amid the current turmoil.