Gold Buying "Impressive" as Deflation Fears Push Central Banks to Slash Rates, Print Money
Gold held steady for US and Japanese investors early Thursday, and leapt for everyone else, as a fresh spike in the currency value of Dollars and Yen – both used to fund leveraged speculation during 2001-2007 – matched new losses in world equity markets.
"Global assets keep deflating, inflation is falling faster than expected," writes Walter de Wet, head of commodity research at Standard Bank in Johannesburg in his Gold Market note today.
"We've become convinced that we'll see a series of aggressive interest rate cuts, especially in the Eurozone and UK...Standard Bank maintains that the bias for the Dollar is towards strengthening in the next three months, and erratically so."
After the S&P on Wall Street closed Wednesday at a new five-year low, Tokyo's Nikkei ended today nearly 7% lower – more than 1,400 points down for Nov. so far – as the Japanese Yen gained 5% against the Euro in violent trade.
Here in London, the FTSE100 tumbled through the 4,000 mark – a 41-month low first hit in mid-Oct. – while the Pound lost almost three US cents from Wednesday's brief high.
For French, German and Italian investors wanting to Buy Gold today, the price moved up to a 3-week high of €597.
The Gold Price in Sterling jumped back above £500 an ounce.
"Gold [was] one of the few assets remaining that could be sold at a reasonable price to meet margin calls on other, worse-performing assets," explained the World Gold Council (WGC) in its latest quarterly report Wednesday, pointing to the apparent failure of Gold's Safe Haven Role during Sept. and Oct.
The WGC reports a record 121% jump in physical gold investment worldwide during the third-quarter of this year.
Global gold-market supplies, in contrast, fell by 9.7% year-on-year, led by a sharp drop in central bank gold sales.
"The rate of physical Gold Buying has been impressive, and supply remains constrained," agrees the latest Fortis Metals Monthly from Virtual Metals, the London-based consultancy.
On the supply side, "dehedging [by Gold Mining firms] continues to fade and central bank sales are very weak," it says.
"Perhaps when institutional investors, such as hedge funds, have stopped liquidating their holdings, the price will gain. But it needs to do so soon to be convincing."
In the broader raw materials market, meantime, forced sales to cover losses elsewhere have squashed commodity-fund investments by one half, Virtual Metals goes on, since peaking above $200 billion in June.
Today crude oil fell towards $53 per barrel, base metals sold off hard, and "safe haven" government bonds rose yet again, pushing the yield offered by 10-year US Treasury debt down to 3.27%.
Yesterday's US consumer-price data put the headline inflation rate at 3.7% year-on-year. Stripping out "volatile" food & energy prices, core CPI – the Federal Reserve's preferred measure – stood 2.2% higher from 12 months earlier, and precisely in line with core US inflation's average growth over the last 10 years.
Even so, "The largest headline CPI decline in the US in years implies to me that [while] gold is a hedge against inflation, it doesn't look like there is any inflation in the short term to hedge," reckons Bart Melek, commodity strategist at BMO Capital Markets, speaking to Canada's National Post.
Put another way, "There's absolutely no need to Buy Gold as a hedge against inflation," claimed Peter Fertig at Dresdner Kleinwort in Hainburg, Germany to Bloomberg News earlier this week.
Physical gold investors disagree, however, while central banks the world over continue to battle the risk of deflation with record-low interest rates and strong money-supply growth.
The Swiss National Bank (SNB) today slashed its lending rate by an unprecedented 1.0% to just 1.0% in an unscheduled move.
"More aggressive easing...should reduce the odds of a deflationary outcome," agreed the US Federal Reserve at its most recent policy meeting, minutes released on Wednesday show.
The US monetary base (meaning currency in circulation and bank deposits held at the Federal Reserve) has expanded by more than 70% in the last two months, creating more cash inside nine weeks than existed in total seven years ago.
Growth in the Bank of England's broad "M4" measure of the UK money supply meantime swelled by 15.1% in October – an 18-year record – figures showed this morning.
New private-sector borrowing rose faster still, up by 16.1% year-on-year thanks to a record monthly expansion of £52.8 billion ($79.2bn), even as the supply of credit to households and business dried up.
The vast bulk of new credit creation, according to Bank of England data, is going instead to non-bank financial corporations – in particular brokers, exchanges and clearing houses needing large cash positions to use as a "fire break" in case of a major counter-party default.
All told, these "other financial corporations" accounted for more than 96% of new UK borrowing in Sept.