Gold News

Gold flips ahead of Euro and Sterling rate news

The world today has more Euro notes in circulation than US Dollar bills. Europe's broad supply of cash and bank deposits is growing by nearly 10% a year – the fastest rates since 1990.

But don't expect the European Central Bank (ECB) to take the heat out of the bubble when it announces Eurozone interest rates at 11:00 GMT today.

"Contrary to conventional wisdom," says a letter to the Financial Times, "the ECB is less monetarist than thought."

"The key driver of ECB behaviour is instead economic growth," explains Jacques Cailloux, chief euro area economist at the Royal Bank of Scotland in London, "with measures of the euro area output gap and official rates displaying an impressive 90 per cent correlation."

In other words, the ECB is secretly targeting economic growth instead of the Eurozone money supply as it pretends. Its anti-inflation forebear, the German Bundesbank, would be horrified!

Sterling rates are also unlikely to rise when the Bank of England speaks at 12:00 GMT. Despite sharp price inflation on Britain's high streets in Dec. – and new debt growth of 16% per year and more – the strong Pound has tied the bankers' hands. It is sucking in imports and "starting to take its toll on the UK economy," according to analysts at HSBC.

November's trade deficit in goods widened to £4.7bn ($9.1bn) said data released Wednesday. Higher rates to curb consumer spending would only make Sterling more attractive to currency speculators. It's already at a 15-year high on a trade-weighted basis.

The US current account deficit meanwhile shrank to $58.23bn in Nov., the narrowest since July 2005. This unexpected drop gave strength to the US Dollar on Wednesday, pushing back gold – which has struggled in today's Asian trade, too.

Gold dropped $2 in New York yesterday, opening in Sydney this morning around $611.50 per ounce. But "if there was any bargain hunting, it would have gone up a bit higher," notes a dealer a Singapore.

"I am a bit scared because we haven't made any headway to the upside," he adds. Indeed, gold made a scary drop to $609.60 by lunchtime in Tokyo.

Japanese gold futures were wild, reports Reuters. And "the volatility that we've seen in the first part of this year is unlikely to settle down," reckons Craig James, chief economist at Commonwealth Securities in Sydney, "[not] until more traders are basically back to their desks right away across the globe."

James foresees a wide short-term range for gold between $600 and $630 per ounce. The gold desk at Scotia Mocatta say it needs to rally and test the 200-day moving average at $619 "or the market will fall victim to fresh selling". They also put support at $600.

Oil prices have also failed to rally, despite a drop in US stockpiles. Copper, zinc and tin finally managed to turn higher on Wednesday, but "the volatility that we're seeing in the commodity markets is going to also reduce some of the allure from precious metals," says James at Commonwealth Securities. "Investors may want to stay away until they have a clearer picture."

A clearer picture is developing for investors in the bond market, meantime. The ABX index of US mortgage-backed bonds has sunk by 7% since the summer. It's dropped 5% since the start of last month. But further price drops are expected as non-payment rates amongst America's poorest homeowners picks up.

"Investors were really shocked in the fourth quarter at the speed of deterioration [in credit quality]," says an ABX trader working for UBS. Foreclosure rates in the "subprime" mortgage market hit 6.1% in Dec. More than 1-in-20 borrowers is now 30 days or more late with repayments.

How much has Wall Street staked on mortgage-backed bonds? For the latest View from the Vault – and a review of the "financial innovation" at work in the markets – click here now and read on...

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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