Gold News

Gold rises as Fed's caught between housing slump and inflation

Spot gold prices held onto an overnight bounce in early European trade on Thursday, starting the day in London above $657.50 per ounce.

Despite the physical gold market staying quiet thanks to a holiday in Singapore, one of Asia's major dealing centres, gold rose against all major currencies.

Gold priced in Pounds Sterling touched £333 – a one-week high – just ahead of the opening.

For French and German investors wanting to buy gold now, the Euro gold price recovered €489 per ounce as the single currency ticked up to $1.3440 in the forex market.

Gold futures traded in Tokyo for delivery in April '08 ended ¥1 higher, but they fell in Dollar terms, down to equal $662 per ounce as the Yen rose slightly on the currency exchanges.

The Nikkei stock index rebounded 1.6%. China's domestic stock market held steady after sinking 6% on Wednesday.

"The key point we are watching is whether gold prices could sustain $650 in the near term," said one Tokyo analyst to Reuters earlier.

"A failure to keep that level could depress psychological sentiment greatly."

Active gold traders will now be watching for a revision to US first-quarter GDP data due at 08:30 New York time.

First estimated at 1.8%, US economic growth was then revised down to 1.3% for Jan. to March after a slide in residential real estate investment.

Today's revision from the Commerce Dept. may cut GDP growth to just 0.8% according to a survey of 78 economists by Bloomberg – a move sure to weaken the Dollar.

And whatever one day's data does for short-term gold prices, the long-term bull market in gold continues despite the noise and fury of short-term leveraged speculators.

Barring a severe setback today, the average gold price in May 2007 will come in around $669 per ounce.

That would be the gold market's fourth highest monthly average ever in Dollar terms, just $10 off April's all-time high.

Fundamentally the case for gold also remains strong – as strong today, in fact, as it was when this bull market first began in 2001.

Wednesday's bounce from a one-week low followed the release of minutes from the latest interest-rate meeting at the US Federal Reserve.

"The correction of the [US] housing sector was likely to continue to weigh heavily on economic activity through most of this year," the notes quote the Fed's policy committee – "somewhat longer than previously expected."

Capping the case for lower rates to stimulate housing, however, "the risks around the anticipated moderation in inflation were to the upside," agreed the Fed members.

Indeed, "some [members] noted that a failure of inflation to moderate could entail significant costs."

The Fed remains trapped between a collapse in real-estate prices and a rising cost of living, in other words.

Doing nothing remains the most likely Fed choice, says Neal Soss, chief economist at Credit Suisse in New York and a former advisor to Fed chairman Paul Volcker.

"If you don't quite understand how the economy's functioning, then there's a temptation to take the view that anything you do to interfere could turn out to be perverse," Soss told Bloomberg overnight.

But with inflation ticking higher, leaving interest rates on hold would in fact mean cutting the real rate of interest – and investors the world over would be likely to buy gold as a defense against the resulting loss of purchasing power. (Click here to read more...)

As investment demand continues to grow, physical gold supply faces severe constraints – most notably in the gold mining sector.

"While there are scores of juniors and much media attention on new production and expansions of existing operations," notes Jessica Cross in the latest Yellow Book for Virtual Metals, "we do not foresee this metal coming to market even in the medium term.

"What is out there is relatively small, at least insufficient in terms of reserves to tempt the major producers, all of whom are still beset by the challenge of reserve replacement."

To access the latest Yellow Book now – and to get the latest expert analysis of central bank gold sales, Asian jewelry demand and gold mining output – click here...

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.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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