“Wave Of Disaster” Threatens U.S. Mortgage Market

Today’s AM fix was USD 1,250.75, EUR 919.80 and GBP 767.99 per ounce.
Yesterday’s AM fix was USD 1,250.75, EUR 923.88 and GBP 773.69 per ounce.

Gold fell $6.70 or 0.54% yesterday, closing at $1,242.10/oz. Silver slid $0.17 or 0.85% closing at $19.85/oz. Platinum fell $16.94 or 1.2% to $1,367.30/oz, while palladium dropped $3.25 or 0.5% to $715.47/oz.

Gold is higher today in London. There is speculation that lower prices, which fell to a four-month low, will lead to increased physical demand. Prices fell to $1,225.55/oz on Monday after another massive sell order led to trading being suspended for 20 seconds for the third time in less than a week. $1,225.55/oz was the lowest since July 8.

S&P/Case-Shiller Composite-20 Home Price Index Not Seasonally Adjusted

The German regulator has joined the British Financial Regulator and is opening up an examination of the gold and silver price ‘setting’ at banks.

The German financial markets regulator is scrutinizing gold and silver price setting operations at individual banks alongside other benchmark processes including Libor and Euribor, Bafin spokesman Ben Fischer told media. Bafin declined to elaborate on the status of the investigation or the banks involved.

Despite the very poor sentiment after recent price falls, gold’s fundamentals are actually quite sound.

Global physical demand is set to be very high again this year and may even reach a new record, despite the 25% price fall.

This is especially the case, as Chinese demand is set to be a new record this year despite the recent slight decline in demand. China’s net imports of gold from Hong Kong alone in October reached the second-highest level on record last month. This does not include direct imports from Australia, Africa, Vietnam and other countries.

Indeed, Chinese demand this year looks set to be a new record for the highest gold demand from one country in one year ever. It is important to look at the aggregate annual demand figures rather than the ebb and flows of weekly and monthly data which can mislead.

Momentum and technical traders are dominant at the moment and with the short term trend down, gold may incur further losses in the short term.

However, the smart money is gradually accumulating on the dips. Dollar cost averaging remains prudent for investors who wish to get exposure to bullion but are concerned about further price falls.

Gold in US Dollars – 5 Year

U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country’s biggest banks according to Reuters Insight.

It would likely also deal another blow to the U.S. property market and the fragile U.S. economy.

Bank of America, JP Morgan and Wells Fargo appear to be the most exposed – meaning that either taxpayers will again be asked to bail out banks or more likely the new bail-in regime will confiscate cash from depositors.

From Reuters:
The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along.

More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.

For a typical consumer, that shift can translate to their monthly payment more than tripling, a particular burden for the subprime borrowers that often took out these loans. And payments will rise further when the Federal Reserve starts to hike rates, because the loans usually carry floating interest rates.

At a conference last month in Washington, DC, Amy Crews Cutts, the chief economist at consumer credit agency Equifax, told mortgage bankers that an increase in tens of thousands of homeowners’ monthly payments on these home equity lines is a pending “wave of disaster”.
In terms of loan losses, “What we’ve seen so far is the tip of the iceberg. It’s relatively low in relation to what’s coming,” Equifax’s Crews Cuts said.

UK Nationwide House Price Index – 1971 – Today

There are concerns about Britain’s property market too and the Organisation for Economic Co-operation and Development (OECD) warned of a UK property bubble last week.

The Paris-based group said, in its semi-annual Economic Outlook, that it was urgent to continue to relax the barriers to housing supply to prevent overheating in the property market. It ignored the fact that the nascent new bubble is in a large part due to near zero percent interest rates leading to renewed property speculation by buy to let investors.

The UK government’s Help to Buy program that aids buyers with smaller deposits has been criticized by the International Monetary Fund and politicians for potentially stoking a property bubble as it boosts demand.

Given the very fragile recovery, despite near zero percent interest rates in the UK and the U.S. and the uncertain international backdrop, property prices in both countries look vulnerable.

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