Gold News

Gold Prices "Due Retracement" as Deflation Skirts US, Eurozone

GOLD PRICES drifted in "another slow" session, dealers said Thursday morning in London, moving in a $4 range below $1240 per ounce as market-talk focused on a growing "threat" of deflation.
 
Asian stocks closed flat on the day, and European shares were unchanged near 6-year highs.
 
Shanghai gold premiums slipped to $13 per ounce, down from a 6-month high of $18 early last week, ahead of the peak household gold-buying season of Chinese New Year.
 
"With inflation running below many central banks' targets," said Christine Lagarde, managing director of the International Monetary Fund late Wednesday, "we see rising risks of deflation, which could prove disastrous for the recovery."
 
The 17-nation Eurozone today reported a drop to 0.8% for annual inflation in 2013.
 
Consumer price inflation in the US was then reported at 1.5% overall, rising to 1.7% as analysts forecast when food and fuel are excluded from 2013's data.
 
"The ECB may loosen monetary policy even further" if consumer prices tip into deflation, says a commodities and gold-price note from Commerzbank, "and the Fed may scale back its bond purchases more slowly."
 
"We are only one short recession away from outright deflation," reckons Albert Edwards, global strategist at French investment and bullion bank Societe Generale.
 
Stock markets have yet to react, however, because investors believe both that the recovery is "self-sustaining" and that the Fed and ECB would increase their money-printing to reverse any deflation in prices, he says.
 
"[But] in the same way investors believe, axiomatically, that [more quantitative easing] will drive up equity prices, they believed exactly the same thing of commodities until 2012," says Edwards, noting the one-third drop in industrial metals over the last 3 years.
 
Gold prices fell by more than 30% between the US Fed announcing QE3 in September 2012 and the start of its "tapering" – finally reducing its $85 billion of monthly money creation – in December 2013.
 
"The short-term uptrend [from $1182 on New Year's Eve] still looks constructive" for gold, reckons Wednesday night's note from Scotia Mocatta, "so long as $1218 holds."
 
But "all precious metals are due a retracement," says one Singapore trading desk, pegging nearby support for gold prices around $1225.
 
Silver tracked gold prices Thursday morning, slipping and then rallying from $20.00 per ounce.
 
The government of Spain – where consumer prices just escaped deflation in 2013, rising 0.3% on official data – meantime raised €2.7 billion in new 3-year debt ($3.6bn) for a yield below 1.6%, the lowest in at least 10 years according to Bloomberg data.
 
US Treasury bonds – a favored "deflation trade" for money managers when consumer prices fell in 2008-2009 – also rose in price today, nudging the annual yield offered to creditors down to 2.87%.
 
Early posting of today's Treasury data last night showed China holding a record $1.32 trillion of US government bonds at end-November, ahead of Japan's $1.19trn.
 
Latest data from Federal Reserve say the US central bank held $2.21trn of US government securities a week ago.
 
Gold prices are "likely to remain under pressure," says ANZ Bank in its daily commodities note, "against a backdrop of a stronger US Dollar [and] rising US 10-year bond yields."
 
But today's weak US inflation data "may add upward pressure on gold," counters Standard Bank, "especially in the light of the weak US employment data last week."

Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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