Gold's glitter lures buyers

(Reuters) - Gold's near vertical climb to historic highs approaching the key $1,000 mark shows no sign of abating as bullish forces such as a sinking dollar and record high oil are not seen fading anytime soon.

Fears that expensive oil will stoke inflation combined with worries over potential stock market losses and the U.S. on the brink of possible economic recession will propel gold higher still, analysts say.

"Don't be surprised to see gold trade up to $1,100 (an ounce) or even $1,200 before year-end 2008," said Jeffrey Nichols, managing director of American Precious Metals Advisors.

"And, with the right confluence of economic and geopolitical developments, we could see gold spike to $1,500 or even $2,000 in the next few years," he said.

Gold hit a record high of $991.90 an ounce on Thursday and was at $986.90/987.40 at 1144 GMT. It has jumped 20 percent this year, 56 percent in the past 12 months, doubled in about 2 years and surged from a low of around $250 in August 1999.

It was previously fixed at a record high of $850 in January 1980 as high inflation linked to strong oil, Soviet intervention in Afghanistan and the impact of the Iranian revolution prompted investors to heavily buy gold. After adjusting for inflation, the 1980 high was $2,119.30 at 2007 prices.

The market has ridden waves of investor buying, which lifted prices nearly 50 percent in the past six months, ignoring a handful of negative factors, with most players betting on even higher prices this year and next.

 

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Money-Market Rate for Euros Climbs to Seven-Week High

(Bloomberg) -- The cost of borrowing euros for three months rose to the highest level in seven weeks as the coordinated effort by central banks to revive lending falters.

The euro interbank offered rate, or Euribor, for the loans climbed 3 basis points to 4.43 percent today, the highest since Jan. 17, the European Banking Federation said. It was the biggest gain since Jan. 25.

The increase in money-market rates adds to evidence a concerted plan by central banks to promote lending and limit the fallout from the U.S. housing slump isn't working. Banks' asset writedowns and credit losses exceeded $181 billion since the beginning of 2007, data compiled by Bloomberg show. Total writedowns may top $600 billion, UBS said last week.

``This will continue to be the story for all 2008,'' said Nathalie Fillet, a senior interest-rate strategist at BNP Paribas SA in London. ``It's less a pure liquidity squeeze like at the end of last year than a reflection that the global credit crisis will last a while.''

Borrowing costs fell earlier this year after policy makers from the U.S., U.K., euro region, Switzerland and Canada announced plans on Dec. 12 to counter the credit shortage. The ECB injected a record $500 billion into the banking system on Dec. 18. The Federal Reserve provided $160 billion in short-term loans since mid-December in six auctions through the Term Auction Facility.

OIS Spread

The difference between the rate banks charge for one-month dollar loans in London relative to the overnight indexed swap rate, the so-called Libor OIS spread used by the Fed as the minimum bid level at its auctions, suggested a decline in the availability of funds. The spread increased to 54 basis points today, from 30 basis points in the week ended Feb. 22. It averaged 6 basis points in the first half of 2007 and 41 basis points since then.

Overnight indexed swaps are derivatives in which one party agrees to pay a fixed rate in exchange for receiving the average of a floating central bank rate over the life of the swap. For swaps based in U.S. dollars, the floating rate is the daily effective federal funds rate.

The difference, or spread, between the three-month money- market rate and the European Central Bank's benchmark rate was 43 basis points. It averaged 25 basis points in the first half of 2007.

``The leverage crunch is unlikely to disappear over the next few weeks,'' Stuart Thomson, a money manager who helps oversee $46 billion in bonds at Glasgow, Scotland-based Resolution Investment Management Ltd., said in an e-mailed note today.

 

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Ambac to Sell Half the Company, Bet May Not Pay Off

(Bloomberg) -- Ambac Financial Group Inc., the bond insurer seeking capital to salvage its AAA credit rating, will sell half the company in a bet some investors say won't pay off.

Ambac said yesterday it plans to issue $1 billion of common stock, more than doubling the number of shares outstanding. The New York-based company will also offer $500 million of units that convert to shares in 2011.

Investors had anticipated Ambac would be bailed out by banks, which would backstop a capital raising of as much as $3 billion, enough to overcome record losses on subprime-mortgage debt. Instead, the company announced it would raise half that amount in a transaction that would dilute existing shareholders, sending Ambac down 19 percent in New York Stock Exchange trading.

``The new offering is highly diluting to existing shareholders,'' Jim Ryan, an insurance analyst at Morningstar Inc. said in an interview with Bloomberg Television. ``The market was looking for a backstop, to say the least.''

The sale of common stock, managed by Credit Suisse Group, Citigroup Inc., Bank of America Corp. and UBS AG, is scheduled for tonight, according to data compiled by Bloomberg.

Ambac fell 26 cents to $8.44 in early New York Stock Exchange composite trading. The shares have tumbled 90 percent in the past year, reducing the company's market value to $884 million.

Abandoned Plan

By proposing a sale of common shares, Ambac is reverting to a plan it abandoned in mid-January. The company announced a $1 billion sale Jan. 16, sparking a 70 percent plunge in its stock, and canceled the offering Jan. 18.

Ambac cut its dividend to 1 cent from 21 cents a share and said it will suspend writing guarantees on debt, including mortgage-backed bonds. The combined plans will probably bolster capital enough for an AAA rating, Moody's and S&P said yesterday.

Stock investors were ``expecting something different in terms of some type of a more orchestrated event that looked less like a conventional offering of common stock and more like a carefully crafted infusion from business partners,'' said Colin Glinsman, who oversees about $25 billion as chief investment officer at Oppenheimer Capital in New York.

Credit-default swaps tied to Ambac's AAA rated insurance unit rose 38 basis points to 513 basis points from 475 basis points before the announcement, according to CMA Datavision in London. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

CDO Losses

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

Ambac, its larger competitor MBIA Inc., and the rest of the industry stumbled after expanding beyond municipal insurance to guarantees on collateralized debt obligations that have since tumbled in value. Bond insurers with AAA ratings have guaranteed $2.4 trillion of debt.

The loss of Ambac's top rating would cast doubt on $556 billion of municipal and asset-backed securities insured by the company, forcing some investors to sell the debt and others to reduce their holdings.

Ambac, which pioneered municipal bond insurance in 1971, and the rest of the industry are reeling from their expansion into CDOs, which package pools of securities then split them into pieces with different ratings.

 

Read more at Bloomberg