Gold News

Gold Slips as Euro Slides on Shock German Data; US Fed Moves to Flood Banks with Cash in "Quantitative Easing"

Gold Prices fell hard early Wednesday in London, losing 1.5% from Tuesday's peak to reach a two-day low as shock data from Germany drove the Euro sharply lower against the US Dollar on the currency markets.

Crude oil meantime pushed above $122 per barrel on news of terrorist attacks in Nigeria, the world's seventh-largest producer.

European stock markets rose 0.7% on average. Tokyo's Nikkei index reached a four-month closing high.

"Yesterday's comments by Thomas Hoenig, president of the Kansas Federal Reserve, that the Fed might need to raise interest rates to curb inflationary pressures, should provide further support to the greenback," notes Walter de Wet for Standard Bank.

"In the event that the Fed raises rates this year (which we believe unlikely), it would be bearish not only for Gold and silver, but also for PGM [the platinum group metals], because consumer spending would come under more pressure."

Now targeting short-term interest rates of 2% – barely half the rate of US inflation – the Federal Reserve will today ask Congress to let it pay interest on cash reserves held by commercial banks.

"If they earned interest from the Fed," says Greg Ip – who first floated this story in the Wall Street Journal last month – "banks would have no incentive to lend out excess reserves for less."

That would allow the Fed to engage in "quantitative easing" – flooding the US banking system with unlimited sums of cash, just as the Japanese central bank did at the start of this decade – but without letting interest rates fall to 0%.

"By paying interest on reserves, the Fed could put a floor under the Fed funds rate and expand its balance sheet to deal with the credit crunch," explains Ip.

The Fed has already lent out half of the $800 billion in US Treasury bonds it held in July last year, accepting lower-grade bonds as collateral from banks and securities dealers.

"[The Fed's $29bn support for Bear Stearns in March] was an inflection point", claimed US Treasury secretary Hank Paulson in an interview overnight, adding that "the worst is likely to be behind us" in the global credit crisis.

For gold investors, "peaks and troughs in financial market stability and risk aversion continue to directly correspond to peaks and troughs in Gold," notes Mitsui, the precious metals dealer, today.

Falling 1.5% from Tuesday's five-session high of $883 per ounce, the Gold Market today tracked the European single currency lower after a surprise 5% drop in German factory orders was reported for March.

Analysts in Frankfurt had expected 5.7% growth.

European retail sales fell by 1.6% year-on-year in March, the Eurostat agency also said today, encouraging speculation that the European Central Bank will be forced to cut its key lending rate in the face of rising inflation.

Today's one-cent drop in the European currency held the Gold Price in Euros above €563 per ounce by lunchtime in London. Poor data from the United Kingdom also forced a sharp drop in the Pound Sterling on Wednesday.

Industrial production shrank by 0.5% in March according to the Office for National Statistics, despite a cut in both the Bank of England's lending rate and a falling cost of UK exports for foreign buyers. The news sent the Pound down to a new 11-week low beneath $1.9550. It helped support the Gold Price in Sterling above last week's high of £444 per ounce.

"As long as we continue to feel inflation creeping into our day-to-day lives, Gold will work higher," reckons George Nickas, a metals broker in New York for F.C.Stone.

Gold's 15% drop from March's all-time high above $1,030 per ounce is merely "a correction" he tells Bloomberg, pointing to the metal's own fundamental strength, as opposed to the Gold Market's apparent reliance on crude oil prices.

Today in India, the World Gold Council forecast a 25% increase in gold sales for this year's Akshaya Thritiya festival. This auspicious date in the Hindu calendar, which falls on 8th May in 2008, marked 55 tonnes of consumer Gold Buying last year – some 5% of India's total gold consumption for 2007.

"This year Akshaya Thritiya is likely to become much bigger than in past years, as Gold Prices are very attractive," believes Ashok Minawala, head of the All-India Gems & Jewelry Trade Federation.

"Akshaya Thritiya is considered very lucky because Akshaya in Sanskrit means ‘that which never diminishes'," says Jayant Manglik, head of commodities at Religare Enterprises, also speaking to the Business Standard in Mumbai this morning.

"It is believed that whatever is done on this day shall continue to increase for the rest of the year. In general, it reflects positively on the person's future. Therefore, consumers want to Buy Gold on this occasion."

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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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