Gold News

Gold breaks $721 ahead of US Fed interest-rate cut

Spot Gold Prices traded flat in Asia on Tuesday before spiking into the London open to break a new 16-month high above $721 per ounce.

"There is no reason to believe the long-term rally has ended," says Christopher Langguth for Mitsui.

"The Gold Price would have to close below $700 to cause another rebuilding process. With all trends up there is no reason to sell or be short."

For British investors wanting to Buy Gold Today the metal also hit a fresh 16-month high above £362 per ounce – a gain of more than 4% from this time last week – as traders prepared for strong volatility ahead of today's US interest-rate announcement from the Federal Reserve.

"If the Fed did cut rates, and its statements sort of implied that there could be further rate cuts, then I think that would be positive for the gold price," says David Moore, commodity strategist at Commonwealth Bank of Australia.

"If the Fed would cut rates by 50 basis points, again hypothetically speaking, I think that would also be quite positive for the gold price."

But it's not only Dollar-Gold Prices and Sterling Gold Prices that have risen in anticipation of fresh credit pouring out of the US Fed today. Versus the European single currency, Spot Gold Prices on Tuesday morning broke €520 per ounce, just a few cents shy of levels last seen in May '06.

Hong Kong gold rose 0.7% for the day, while gold futures traded at the Tocom in Tokyo rose 1.4% against the Yen to end the session equal to $722.60 per ounce.

On the currency markets, both the Yen and the Euro held flat around ¥115.00 and $1.3860 respectively, but the British Pound continued to slide – dipping below a three-and-a-half week low of $1.9900 – despite the UK government's shock announcement that it will underwrite all saving deposits held at Northern Rock, the struggling mortgage bank that has suffered a "run" by panicked depositors since seeking emergency help from the Bank of England as "lender of last resort" last week.

"These have been troubled times but Northern Rock will prevail," writes the chief executive, Adam Applegarth, in a full-page advertisement in today's London press. "We will not let you down."

Today's queues of anxious Northern Rock savers started forming at 3am according to the Daily Mail. Thanks to the government's promise to underwrite all £22 billion still outstanding in Northern Rock deposit accounts, the share price recovered 20 pence of the £9.76 it's lost since peaking in Feb.

Over in Tokyo meantime, the Nikkei stock-market index sank 2% today – taking its losses for the year-to-date above 8% – as a sell-off in banking stocks began after Credia Co. became the first Tokyo-based lender to admit it faces bankruptcy following a change in Japan's usury laws.

A Supreme Court ruling of late 2006 cut the maximum interest-rates chargeable to consumers from 29.2% to 20%. It effectively made any interest charged above 20.9% illegal according to The Australian.

A rash of legal claims from consumer borrowers has now forced Credia to collapse with debts of ¥76 billion. It reported revenues of ¥26.7 billion in the year to March.

"I don't think this will be a big shock," reckons one Tokyo fund manager. "Everybody knows it's a very severe situation in the consumer lending industry."

Across the Asian-Pacific region equities suffered their worst day in a month according to Bloomberg data, with Bank of America warning that losses from subprime US mortgages – known in the industry as "toxic waste" – will dent earnings. National Australia Bank dropped to a seven-week low.

"The flow-over to the UK has provided a reminder that the credit crunch remains in place," said Shane Oliver, a manager of funds totaling $83 billion at AMP Capital in Sydney. "Risks are still fairly high when it comes to financials."

Crude oil meantime jumped to a record high above $81 per barrel, with analysts surveyed by Reuters forecasting the fourth week of falling US stockpiles.

Goldman Sachs yesterday predicted an oil price of $85 per barrel by Christmas, perhaps rising above $90 as supplies fail to meet growing global demand.

Wheat prices also soared after the Australian government cut its harvest forecast by nearly one-third following severe dry weather. Globally, stockpiles of wheat now stand at a 26-year low.

But despite this strong inflation in everyday costs, a Bloomberg survey of the 21 primary dealers who underwrite US government debt shows that 15 expect a quarter-point cut at the Fed today. Six are forecasting a half-point cut.

The only asset class to thrive during the negative real interest rates of the late '70s, Gold Bullion also doubled for US investors during the negative real rates of 2003-2005. For British investors still suffering negative real rates after tax today, the Sterling Price of Gold has risen by 11% so far this year.

To Buy Gold at live market prices today – cutting out the middleman to own professional-grade bullion in a secure vault in Zurich, Switzerland – be sure to visit BullionVault now...

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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