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Gold Jumps into 2010 as China Booms, Oil Rises, "Structurally Weak" Dollar Faces "Historic Inflation Policy"

Gold jumped higher in Asian and early London trade on Monday, kick-starting 2010 with a 1.8% gain to hit two-week highs as world stock markets rose together with base metal and energy prices.

Government bonds fell, as did the US Dollar – down to $1.44 per Euro by mid-afternoon in Frankfurt.

The Bank of England meantime reported a sharp decline in Britain's money-supply growth.

Eurozone investment sentiment rose to the best level since May 2008, but lagged analyst forecasts with a negative reading.

"There were different reasons for [gold's 2009] gains," notes Swiss refiner MKS in a note. "For Physical Gold, it was mostly buying interest by investors and speculators and buybacks of hedging positions by the [mining] producers.

"Also, national central banks became buyers. China, India, Russia and Mauritius stocked up on their gold reserves."

Looking ahead to 2010, Standard Chartered's Helen Henton – the most accurate 2009 forecaster in Bloomberg News' survey – said Gold Bullion will continue to rise on "central-bank buying, the structural change in interest for gold from retail investors, and in the second half the resumption of the weakening trend in the Dollar."

Henton sees the Gold Price averaging $1150 this year – up from the 2009 average of $974 per ounce – before rising again to $1300 in 2011.

Shorter-term, the first week of the New Year brings a flood of key US data, starting today with the ISM Manufacturing Index.

"Most notable is Friday's US non-farm payroll data," says commodities analyst Walter de Wet at Standard Bank, noting that the much better-than-expected November report was "instrumental in triggering the current Dollar rally.

"With gold close to $1100, dips are likely to be bought [and] we continue to see physical buying in the gold market...As we head into Q1 (a low seasonal period) we could see this demand slow [but] overall we still believe gold will trade higher in 2010."

Recording the first London Gold Fix of 2010 at $1113 per ounce, gold stood 28% higher from the start of 2009 and 294% above the AM Fix of Jan. 4th a decade ago.

US crude oil contracts meantime broke above $81 per barrel early Monday, following news of the worst snowfall in Beijing and Seoul for 50 years, plus an unresolved dispute between Russia and Belarus over export duties on supplies destined for Europe.

The US National Weather Service forecast two weeks of "below-normal" temperatures for the eastern United States. They account for well over 80% of national heating oil demand.

Silver for immediate delivery rose almost 1.9% in London dealing this morning, while base metals extended their 2009 rally, which helped the CRB commodities index achieve its strongest year-on-year gains since 1973, up by 24%.

Copper hit a 16-month high as miners began a strike at Chile's Chuquicamata, the world's second largest copper project, responsible for 4% of global output.

China – which accounts for 43% of world base-metal demand according to J.P.Morgan – today reported its strongest ever PMI Manufacturing survey. Brokerage and research house Enam last week forecast a 15% rise in China's aluminum demand for 2010.

Across the Pacific, "We have the most potentially inflationary policy I have ever observed in a developed country," says Alan Meltzer, a central-bank historian and professor at Carnegie Mellon's Tepper School of Business in Pittsburgh, speaking to Reuters.

The Conference Board says US consumers now expect 5.1% annual inflation on average. A private-bank survey says 61% of its clients foresee "above target" inflation between 2011 and 2014.

"The Fed and Bank of England are unlikely to hike rates before the fourth quarter, while the Bank of Japan and European Central Bank should either leave rates unchanged all year or cut," reckons Steven Barrow, chief forex strategist at Standard Bank.

"We believe that the Fed will not exit monetary easing as fast as it entered...We remain structurally bearish of the Dollar on a long-term view."

Chief US bank regulator and monetary policy-maker Ben Bernanke denied in a speech on Sunday that the Federal Reserve was to blame for the sub-prime and financial bubble of 2004-2007.

"The best response to the housing bubble would have been regulatory, not monetary," the Fed chairman said.

New Year's Day in Vietnam – Asia's second-largest private gold consumer after mainland China in 2008 – saw a raft of new regulations introduced by the communist government in Hanoi, including a ban on margin trading in leveraged Gold Investment products.

Besides imposing stock-market taxes of either 0.1% upfront or 20% of net gains – as well as a fine equal to $270 for singers caught lip-syncing at live performances – prime minister Nguyen Tan Dung ordered the closure by end-March of more than 20 gold exchanges which currently allow private investors to trade on credit with only 7% down.

The central bank had previously recommending forcing leveraged investors to pay the full cash-price for their Gold.

Vietnamese Gold Prices rose more than 50% during 2009, driven by a sharp devaluation in the local Dong currency, frantic gold accumulation by private households, and a government ban on new imports of metal.

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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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