Gold Nears Weekend Above $1000, Says "Something's Wrong" in the US as Dollar Becomes "New Carry Currency"
Gold rose back above $1,000 an ounce as the US opening drew near on Friday, while European equities added to this week's gains and crude oil held above $71 per barrel.
The Dollar bounced from new 2009 lows on the currency market, helping
gold priced in Sterling recover £600 and the price for Euro investors
wanting to Buy Gold climb back above €685.
By lunchtime in London, the UK's FTSE100 index stood 3.5% higher for the week, but government bond prices also rose, pushing the yield offered by 10-year US Treasuries down to 3.65%.
New data showed US import prices jumping 2.0% in August from July.
"Gold has held up surprisingly well, finishing close to its start for the last two days," says MKS Finance, a division of the Swiss refining group, in a note.
Heading towards the weekend 0.7% higher for Dollar investors from last Friday's finish, the price of Gold averaged across both the last 30 and 90 days has hit new record highs this week, moving above the previous peaks of April '08 and June '09 respectively.
"It remains to be seen how the yellow metal will react to physical selling," cautions MKS, "with scrap sales always a few days lagging after a sharp rise. As the US Dollar loses ground to the major currencies, gold ought to be subject to a correction before possibly trying higher."
"Ordinarily, we don't pay too much attention to the Dollar's ups and downs," says an editorial in Los Angeles' Investor's Business Daily. "Neither do we closely watch gold. [But] since the advent of the new US administration last November, the trade-weighted Dollar has fallen 7%, while Gold in recent days has risen above $1,000 an ounce...sending a clear message:
"Investors are worried about what they see in the United States."
"US Dollar – the new carry currency?" asks Neil Hume at the FT's Alpha blog today, after the 3-month interbank lending rate for US Dollars fell to a record low of 0.299% on Thursday, "leaving it some way below the Yen and the Swiss Franc."
Those "traditional funding currencies...are not weakening," notes Steven Barrow at Standard Bank, even though "high yield/high risk currencies have rallied for most of this year in what seems to be a return to the carry trade" in which speculators borrow in a low-cost currency and sell it for higher-rate money, pocketing the interest-rate differential as easy money.
Begun when Tokyo interest rates fell to zero a decade ago – and put at $1 trillion by The Economist in early 2007 – the Yen Carry Trade knocked 40% off the Japanese currency's international value as traders repeatedly sold it on the forex market.
The strategy blew up however when the banking crisis hit two years ago, forcing Yen-debtors to buy back the money they'd borrowed at ever-higher prices. Inside 18 months, this unwinding of the Yen carry trade pushed the Japanese currency 108% higher vs. the British Pound and 121% higher against New Zealand Dollars.
"It's notoriously hard to find real data to determine the size of carry trades funded out of any currency," says Barrow, "let alone the US Dollar. Nonetheless, we feel it advisable to assume that this funding switch [from Yen to Dollars] is happening to some extent."
On the data front early Friday, Japan revised its second-quarter GDP figures down to 0.6% growth from the initial 0.9% estimate.
Both the UK and Germany reported a sharp rise in factory input prices for August, up 2.2% and 0.7% respectively from July.
Over in the usually hungry Indian Gold market meantime, prices breached new record highs above 15,900 Rupees per 10 grams. "Looking at the current scenario, prices are likely to rise to the 16,500 level in the coming weeks," reckons one dealer in Zaveri Bazaar, potentially denting the post-harvest festival buying set to peak with Diwali in mid-October.
Fourth-quarter Indian gold buying is typically three times larger than over the preceding three months according to analysis by Standard Bank's commodity team, and "The seasonal pattern should remain," they believe, "irrespective of the actual level of demand."
Should Indian Gold Prices continue to rise, however, "More and more people will start selling," says Harmesh Arora, vice-president of the Bombay Bullion Association, speaking to Dow Jones.
"Some re-stocking of imported gold is happening, but retail sales are dismal," says one Mumbai dealer.
"Many of the jewelers have been offering discounts of 50-80 Rupees per 10 grams [0.5%] to bring in customers," the newswire quotes another Mumbai dealer.
Meantime in China – destination for 31% of all the physical gold sold worldwide between Jan. and July – the National Statistics Bureau said today that industrial production rose 12.3% in August from a year before. Retail sales jumped 15.4% year-on-year.
"Industrial activity should continue to grow in the coming months, underpinned by resilient domestic demand and a rebound in exports," reckons J.P.Morgan's local equities chief.
Saving a massive 23% of China's gross domestic product last year, private households have almost doubled their gold purchases as a proportion of savings since 1998, taking it to more than 1.8% last year and spending a record $5.7 billion on jewelry and physical Gold Investment in the first half of 2009.