Gold News

Gold Bullion Jumps Out of "Limbo" as Suggestion of US Fed Tightening Outweighed by Global Liquidity & Eurozone Debt Worries

Gold Bullion jumped above its 3-day trading range vs. the Dollar in London on Wednesday, hitting $1429 per ounce as world stock markets rose but major-economy government bonds slipped in price, alongside oil and base metals.

Silver Bullion rose 1.7% to $37.67 – just shy of last week's new 31-year highs.

The British Pound rose following news of a sharp "bounceback" from the mid-winter slump in UK retail sales, leading analysts to forecast a rise in Bank of England interest rates.

With real UK interest rates – adjusted for inflation – currently more negative than at any time since the late 1970s, the Gold Price in Sterling today pushed up to £891 per ounce, some 2.8% higher from the start of March.

"We expect gold to remain rangebound in the immediate term, at least up until the end of the week," said a note late Tuesday from dealers at the MKS precious metals and financial services group in Geneva.

"Gold [was] in limbo...awaiting further news or numbers to give direction."

Looking ahead to Friday's official US employment report, "Our real interest lies with what the labour market signals for Fed policy in terms of liquidity," says Walter de Wet at Standard Bank in London.

"When the Fed drains liquidity, it will be bearish for commodities in general, for gold specifically," explains de Wet, noting that gold "has by far the greatest causality with [money-supply] liquidity, followed by crude, and then the base metals."

Tuesday saw non-voting Federal Reserve president James Bullard say in a speech that "If the economy is 2011, I think it will be time for us to start to reverse our ultra-aggressive and ultra-easy monetary policy."

A new auction of 5-year US Treasury bonds drew the highest interest rates paid by Washington in 11 months.

ADP Payroll's private-sector data today showed weaker-than-expected growth in US hiring for Feb.

On Standard Bank's metrics, the Federal Reserve's balance-sheet only accounts for one third of global liquidity. The remainder – calculcated by Standard Bank from other central-bank currency reserves – has already swelled by 3.5% since the start of Jan.

As for the widely-touted rise in Euro interest rates due on April 7, "the greatest initial impact for commodities...may come via the exchange rate," says de Wet, because it may support the Euro vis-à-vis the Dollar and provide support for commodities on the downside."

The Euro was little changed below $1.41 to the Dollar on Wednesday, helping the price of Gold Bullion for French, German and Italian buyers unwind the week's 1.3% loss so far to trade back at almost €32,600 per kilo.

"Financial markets throughout the Euro area have been under pressure [from] credit-rating actions," says a new report from the International Monetary Fund, even though those credit-rating downgrades "were concentrated in few countries such as Greece, Iceland, Ireland, Portugal and Spain."

Following yesterday's fresh downgrade of Lisbon's credit rating by the S&P agency, Portuguese 10-year bond yields today rose further above 8.0%.

"There seems to be no relief," says one analyst quoted by Bloomberg, "and it's only a matter of time before Portugal asks for help."

"Investment demand will remain the key determinant of where the Gold Price goes over the next year or two and sovereign debt fears will be the engine room behind that," said Paul Burton – managing director of London's GFMS World Gold Limited – at the first day of this week's Paydirt 2011 Gold Conference in Perth, Australia on Tuesday.

Looking at global Gold Mining supply, "It has been a lean time in terms of major finds," Burton said, quoted by MineWeb.

"We can expect, because of current prices, that there will be a short-term rise in gold production but it will decline thereafter, and this will only add to merger and acquisition activity."

The Gold Mining industry is making less profit than many people assume, he went on, because "total cash costs" – including the infrastructure which local governments now demand in exchange for granting licenses – have risen sharply.

"Basically, the sector needs the Gold Price to stay above US$800 an ounce for a producer to stay in business."

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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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