Gold News

Gold pulls back from two-week high as UK money-supply explodes

Spot gold prices dropped at the US open on Wednesday, giving back Tuesday's late gains after trading in a tight range around $660 throughout the Asian and London sessions.

The PM Fix came in at $657.60 per ounce – more than $2 below the AM Fix, which had recorded a two-week high.

Priced against the British Pound gold briefly dipped below £330 as Sterling continued rallying above a 10-day high on the currency markets, driven by news that the Bank of England very nearly voted to raise UK interest rates in June.

The minutes of the Old Lady's most recent meeting showed the governor, Mervyn King, voting in the 4-5 minority for another baby-step to 5.75%.

Even if the governor had prevailed, however, cash on deposit after tax and inflation would still pay zero per cent real interest right now. (British investors can read more about the destruction of Sterling cash savings here...)

Giving away cheap money always finds plenty of takers, added the Bank of England is a further data release today. The UK money supply grew by 13.8% annualized in May, faster even than in April.

Allowing for the effects of securitization, private-sector lending grew by £35.3 billion ($70 billion), taking the 12-month growth rate to 14.7% in May from 13.8% in April.

(Do central bank policy makers really have any control over the supply or value of money today? Read on here...)

Back in the gold market the Euro gold price meantime traded below €490 per ounce after hitting its own two-week high of €493.

"Investors are a little bit uncertain about the potential for gold prices to move significantly higher in the short term," reckons David Moore at the Commonwealth Bank of Australia in Sydney.

"If the gold price was to move back to around $650 an ounce, I suspect that you might well see some people who would be buying gold on the dip at that point."

Tuesday's near-1% jump above $660 came as US Treasuries found a bid in the bond market, pushing the 10-year note's yield down to 5.08% from last week's six-year record above 5.32%.

But even with the threat of higher real rates of interest subsiding, the spot gold market is "still stuck around the important 658 level," notes Phil Smith for Reuters Market Technicals, "which will continue to be significant.

"The weekly trendline is still worth watching for support," he adds, starting "from Q3 05." (Get the bigger picture of gold's long-term bull market here...)

Physical gold trading in Asia was muted according to Leon Lee, a dealing officer at the Bank of China in Hong Kong.

"It's just a $1 range of $660 to $661," he said. "It's very quiet today."

At the Tocom in Tokyo the April '08 gold futures contract hit its highest level since June 7 before pulling back to end 0.5% higher at the equivalent of $666 per ounce.

The Japanese Yen remained at a four-and-half year low to the Dollar after a survey of confidence amongst large Japanese manufacturers fell sharply for April-June from the start of the year.

"The pace of future interest rate adjustments will depend on the degree of improvement in the economy and prices," said Bank of Japan deputy governor Toshiro Muto in a speech earlier today.

"There is no predetermined schedule," he added – dashing hopes that Yen interest rates could rise despite the weak economy, keeping a lid on Japanese bond yields and helping the Nikkei equity index climb 0.25% for the day.

As paper assets push higher thanks to a continuing flood of cheap money worldwide, where should you look to invest today? Click here for the big picture 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.

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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