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Gold beats stocks and bonds in Q1 - subprime collapse and higher food costs create "perfect storm", says leading market commentator

LONDON, Apr. 2nd 2007 - Spot gold prices may have subjected investors to a wild ride since Jan., says a leading market commentator today.

But the metal still beat stocks and bonds in the first quarter.

Up 4.7% against flat equity and fixed-income markets, gold continues a trend begun in 2001. Looking ahead, the evidence shows how gold bullion could well keep beating Wall Street and Washington's paper assets throughout 2007, too.

"The Fed's stuck between a rock and a hard place," says Adrian Ash, head of research at BullionVault.com, the world's fastest-growing gold ownership service.

"Inflation in the cost of living is rising rapidly - driven by rising food and debt-service charges, as well as higher energy costs.

"But raising rates to temper the threat of inflation simply isn't an option. The collapse of America's subprime mortgage market looks set to keep the Fed on 'hold' in 2007."

Rising inflation plus static Fed rates will create the "perfect storm", says Ash, for gold to continue its six-year bull market.

"There's a clear historical link between the real rate of interest paid on US Dollars, and the fortunes of gold bullion investors. Lower returns after the cost of living tend to push fresh investment cash into gold. Higher returns push the metal lower.

"During the '70s, the Fed refused to raise Dollar interest rates to recompense US savers after inflation - and that made gold relatively attractive.

"Once Paul Volcker took over at the Fed, however, and hiked US rates so high that real returns on the Dollar broke 9% after inflation, the price of gold sank. It dropped by one half.

"The question for investors today," says Ash, "is whether Ben Bernanke, the current Fed chairman, really has any Volcker-ism in his blood. Unless real rates turn higher, the bull market in gold looks set to continue."

Adrian Ash, head of research at BullionVault.com, is City editor of the widely-read Daily Reckoning email. A regular contributor to MoneyWeek - the award-winning investment magazine - he is also quoted and republished by many of the leading gold websites online.

Source: www.bullionvault.com/gold-news


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