Gold News

Gold Spikes as Dollar Slumps After Bernanke Speech; Inflation + Slowdown = Worst of Both Worlds

Gold Prices jumped in late London trade on Thursday as the US Dollar slumped after a speech by Ben Bernanke, chairman of the Federal Reserve.

"Further sharp increases in crude oil prices have put renewed upward pressure on inflation," Dr.Bernanke told the Joint Treasury Committee, "and may impose further restraint on economic activity."

Inflation + economic slowdown = stagflation, in short, "the worst of both worlds" as one currency trader put it.

By lunchtime in New York on Thursday, Gold Priced in Dollars broke back above $844 per ounce, just shy of the 27-year high reached early Wednesday. It then slipped to end London trade just shy of $839.

The US Dollar meanwhile sank again on the currency markets, falling towards new record lows on its trade-weighted index as the Euro touched $1.4700 yet again and the British Pound broke through $2.1100.

Gold's late surge didn't only come against the ailing greenback, however.

Gold in Sterling pushed above £400 per ounce for only the second time in history following Bernanke's blundering performance in Washington.

For Eurozone investors wanting to Buy Gold Today, the price touched €575 per ounce, just €1 shy of yesterday's 23-year highs.

"The depreciation in the Dollar is forcing commodities higher," reckons Tom Hartmann, a broker at Altavest in California, speaking to Bloomberg.

"Prices have had to rise to maintain their value. If we get into an inflationary cycle, gold can go higher than the old record."

Gold in Jan. 1980 reached an all-time top of $850 per ounce, but the Gold Market then dropped $200 inside a week.

So far in this current move, Gold Prices have now held above $800 per ounce for five days running. The 1980 spike managed only two days above that level.

"All the key drivers are pointing upwards at the moment and prices seem set to challenge $850," says Suki Cooper at Barclays Capital in London.

"Given where speculative [gold futures] positions are, you could expect to see a correction. But if you consider net long positions as a percentage of open interest on the US gold futures market, we are not at an all-time high yet.

"We could see more long positions being established. The sentiment is very positive at the moment, thus Gold Prices could advance further before we see a correction."

Adding to this surge in Gold Investment demand, meantime, the world's major gold-mining companies continue to buy back gold positions that they sold as prices slumped in the late 1990s.

Between July and Sept. this year, in contrast, the world's gold-mining companies cut their outstanding "hedge" position by 6.7% according to the Q3 Hedge Book released today by Mitsui, Halliburton and Virtual Metals.

That was less than half the rate of reduction during the previous quarter of 2007, however, and it was slower again than the 9.7% reduction in summer 2006.

"This was the 22nd quarterly decline [in the global hedge book] and takes hedging on that measure to 29.1 million ounces," the report said. "The largest reduction in hedging was by Newcrest Mining, who cut their position by 2.5 million ounces as they began a program to close out their entire 4.2 million-ounce hedge."

Pulling in the other direction, on the other hand, gold jewelry demand in India – the world's hungriest physical gold market – is now being crimped by the current surge in Gold Prices.

"Sales were hardly 15% of what we saw last year for [this week's Hindu festival of] Dhanteras," said a gold wholesale in Mumbai to Reuters earlier.

But "people who had postponed their commitments are Buying Gold Today due to the religious factor [of Diwali]," countered a jeweller in Lucknow, speaking to the Times of India, "as it is perceived to bring good fortune."

Across the border in Pakistan, the autumn wedding season has failed to ignite gold sales notes The Post in Islamabad. Profits have "dipped because of high prices and the prevailing uncertainty followed by imposition of the emergency situation in the country," said the president of the Jewelers Association of Islamabad and Rawalpindi.

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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.

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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