Gold Holds Near Post-Bernanke Highs on Merrill's Write-Down, Negative Bond Yields

Spot Gold Prices held 1% below their new overnight records in London early on Friday, flipping around $890 per ounce as the US open drew near.

"Yesterday the Gold Market looked bearish on the day [but] after the initial dip we had a rally of $30," notes this morning's comment from Mitsui, the metals dealer, in Sydney.

"Today it looks as though $900 should be tested – but beware, it is a Friday after all!"

Thursday's sharp rally – and the following surge to almost $898 per ounce – came after Ben Bernanke, chairman of the Federal Reserve, signaled further cuts to US interest rates that look sure to destroy the purchasing power of the Dollar further still.

This morning, the New York Times then reported that Merrill Lynch, the largest US investment broker, is about to announce new losses on its mortgage investments costing $15 billion.

"People are surprised at the huge loss," said one Tokyo bond-fund manager to Bloomberg. "The equity market collapsed and the bond market rallied."

By lunchtime in London the price of two-year US Treasuries had risen to push their yield down to 2.67%, a three-year low that's sharply negative even accounting for only inflation CPI inflation rates.

The FTSE100 share index stood 0.7% lower for the day after the Japanese Nikkei had earlier finished the week another 1.9% lower.

Tokyo's leading stock market index has now dropped one-tenth of its value since the start of this month.

"The outlook for real activity in 2008 has worsened," Bernanke said in Washington yesterday. Evoking the easy-money spirit of Alan Greenspan, "we stand ready to take substantive additional actions as needed to support growth and to provide adequate insurance against downside risks," the current chairman went on.

The Dollar immediately dropped 1.5 cents to the Euro, but that failed to spot the Gold Price in Euros also shooting higher.

By early afternoon in Frankfurt on Friday, gold was trading above €603 per ounce – more than 1.7% higher from the same time on Thursday in a clear challenge to the European Central Bank's much-touted "anti-inflation" stance. Ben Bernanke's comments seemed to contrast sharply with yesterday's statement from ECB chief Jean-Claude Trichet, who kept Eurozone rates on hold at 4.0%.

Trichet told a press conference after the ECB's decision that it is in a state of "total alertness" on the risk of wage demands pushing consumer-price inflation higher. But his cant is no substitute for tight money, and with money-supply growth in the 15-nation currency zone now at a three-decade record, the Gold Price for German, French and Italian investors has gained nearly 10% in the last month alone (Parlez-vous central banking? Read more on Trichet, the Euro & Gold here...)

"People are looking at the geopolitical calendar in 2008, and they're looking at Iran and at what's happening in Pakistan," says Jonathan Barrett of Commodity Broking Services in Sydney.

"They're [also] looking at inflation out of China and India; those economies still are growing. Add a little bit of financial risk – actually a lot of financial risk – in America, and I think that's a concern."

Bank of America said today it is buying Countrywide for $4 billion in stock. The No.1 US mortgage lender is rumored to be on the very verge of bankruptcy.

"I also think that people now have the means to invest in gold," Barrett added on CNBC's Squawk Box today. "Remember in China we've now got a new gold [futures] market there.

Meantime "central banks looked at gold a long time ago and said they were going to get out of gold, now they're getting back in," Barrett went on, citing the central banks of Russia, China, South Africa and the Middle East as gold buyers right now.

In the broader commodities market today palm oil futures and Malaysian soybean prices hit all-time records. The European Cocoa Association said its members' output fell to a three-year low at the end of 2007, down 2.9%.

Copper prices continued to rise in London, pushing towards their best weekly finish since Sept. after new data showed a sharp increase in demand from China – the world's largest consumer of the metal.

But oil prices, in contrast, continued to fall, adding to Thursday's 2% loss and heading for the sharpest week-on-week fall since Nov. after China reported a drop in its rate of money-supply growth.

The broad M2 measure of China's money supply rose by a mere 16.7% in the year to Dec. said the People's Bank this morning. Down from 18.5% in Nov., the rate of monetary inflation in the world's fastest-growing economy still slipped to only a seven-month low, however.

Looking to Buy Gold but want to avoid high charges and complex mutual-fund schemes? For direct access to live Gold Market prices – plus outright ownership of physical gold stored in Zurich, Switzerland for just 0.12% per year – click through and join BullionVault now...