Gold News

Gold Sinks as Dollar Continues Its "G5-Only Rally"; Real Dollar Crisis Awaits China's Decision, Says Nobel Economist

Gold Prices caught up with crude oil and the Euro at the London opening on Thursday, falling hard to a three-week low as the US Dollar continued to rally after losing 40% of its foreign exchange value over the last six years.

"This is definitely Dollar-based," David Thurtell, a metals analyst with BNP Paribas, told Reuters this morning.

"Gold is more of a currency hedge than any other commodity. Generally people are really starting to reassess their outlook for the Dollar."

Today on the forex market the US currency rose for the third day running, pushing the Euro below $1.5380 and breaking above ¥106 to the Japanese Yen for the first time since February.

Crude oil slipped beneath $122 per barrel – twice what it cost in June '07 but more than 10% off its top of last month.

The British Pound meanwhile slipped below $1.9460 as the Bank of England kept its key interest rate on hold at 5.0%.

The UK's largest mortgage lender, Halifax, today reported an average drop of 2.4% in British house prices, the fourth monthly loss in succession. House prices remain at historic highs, however, according to a separate report from the Hometrack consultancy.

Average mortgage costs now devour 34.5% of earnings for first-time buyers, against a previous peak of 34.1% in 1990.

Hoping to avert a sharp up-turn in foreclosures, says the Financial Times, the British banking industry's Council of Mortgage Lenders has written to the British finance minister to demand a "safety net for borrowers in financial difficulty."

Over on the securities markets today, European bond and stock prices held flat after the European Central Bank (ECB) surprised no one by keeping its target interest rate on hold at 4.0% for the 12th month running.

Germany factory orders fell by almost 2% in April from March, the official data agency said today.

Tomorrow (Friday) brings the latest data on US unemployment – expected to rise to 5.1% of the working population – as well as average earnings.

Forecast to have risen by 3.4% in May, US wages continue to inflation in consumer prices, now running at 3.9% annually.

"We see little indication today of the beginnings of a 1970s-style wage-price spiral," said Federal Reserve chairman Ben Bernanke in a speech to graduating students at Harvard University on Wednesday.

Even so, "some indicators of longer-term inflation expectations have risen in recent months," he continued.

Adding that "central bankers don't do satire," he then said the Federal Reserve will "monitor that situation closely."

But while the Fed's sudden pretences to a "Strong Dollar Policy" this week have boosted the US currency against the Euro, Yen and other G5 currencies, the Dollar has continued to decline against emerging-market currencies.

Indeed, "most of the Dollar's decline [from here] will be against key emerging economies," says Richard Clarida, a strategic adviser to the Pimco bond fund and professor of economics at Columbia University.

He points in particular to the Russian Ruble and Chinese Yuan. Versus the Brazilian Real, the Dollar has lost almost 7% since the start of April whilst holding flat overall against the Euro.

"No doubt about it," said Nobel prize-winning economist Robert Mundell in an interview with Reuters earlier this week – "inside the Chinese government there's a lot of discussion going on" about how to handle its huge $1.6 trillion in foreign currency reserves, mostly held in the US currency.

"I see the problem coming maybe in the next recession. There could be a real Dollar crisis in five years.

"What you need to have is an International Monetary Fund that's going to take some of these excess Dollars, put them into a substitution account inside the IMF or some other institution and then use that and create what is a new international currency,

"This kind of proposal would be very acceptable inside China," says Mundell, who claims to be involved in the Beijing regime's discussions. (Read more on such Big Thinking Currency Plans here...)

For the time being, however, "the market sentiment has turned bearish for Gold," says today's note from Mitsui, the precious metals dealer in London.

Dennis Gartman, publisher of the eponymous advisory letter costing upwards of $5,000 per year, today advised his clients to "sell a little bit of gold short."

Longer term, advise Tim Price of PFG Wealth in London, "there are few things you can count on in a full-blown economic and financial crisis – not central banks, politicians or Wall Street banks, and not paper currencies.

"The dollar lost 98% of its purchasing power during the 20th century.

"But several thousand years of world history point to an alternative store of value, in the form of Gold – that iconic, shiny yellow metal, whose very scarcity is its abiding strength."

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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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