Gold News

Gold Rises, Silver Volatility Jumps, as China Raises Interest Rates, "Very Loose" Policy Risks "Exponential" Food Inflation

The price of Gold jumped to 3-week highs Tuesday morning in London, rising as world stock markets stalled and commodity prices fell following a new interest-rate hike by the People's Bank of China.

Silver Prices also recovered from an earlier dip after touching a four-week high at $29.80 per ounce.

Since the start of Aug. 2010, daily swings in the price of silver have jumped to moving 2.5 times as fast as gold.

That compares with a four-decade average of silver being 1.8 times as volatile as Gold.

"You've seen emerging-market assets underperform developed-world markets for the better part of two-and-a-half months, and the reason is inflation," said Swiss bank UBS's head of emerging-market fixed-income and currency strategy Bhanu Baweja to Bloomberg this morning.

"This is a world obsessed with demand...[and] many central banks' policy settings are very, very loose...making for serious inflationary pressures."

The outlook for food prices is that they could rise exponentially from here if we were to see another shock. There's no buffer right now."

Today's rate-hike by the PBoC takes lending costs to 6.06% per year, while bank-deposit savings accounts will now pay 3.00%.

Consumer price inflation was last pegged at 4.6% per year on the official data. Food prices rose 7.2% in 2010.

"Currency appreciation will also likely be part of Beijing’s efforts to curb inflation over 2011," reckons RBC Capital Markets, "with officials signalling a greater willingness to tolerate CNY strength."

Last week's US Treasury report on the Yuan fell short of labeling Bejing a "currency manipulator" as some in Washington had hoped, but did say the Chinese currency was "substantially undervalued".

With mainland China's financial markets still closed for the Lunar New Year's celebrations, and Asian Gold and silver dealing "around half" nomal levels according to dealers, the Yuan ticked higher inside its tight trading band against the US Dollar.

The US Dollar was little changed again the Yen, Euro or British Pound, holding prices for Japanese, Eurozone or Sterling investors wanting to Buy Gold firmly in line with last week's finish.

"It seems the market is playing out according to a consensus," says one Hong Kong dealer in a note. "The conomy is recovering, therefore white metal should outperform gold – definitely the case for silver."

"Platinum is outperforming with silver catching up as well while gold remains sidelined," reckons Axel Rudolph  in his latest technical analysis at Commerzbank.

"Trading in gold remains lacklustre, with investors hesitant to commit," agrees James Zhang at Standard Bank, but "while appetite for risk seems to be growing, gains in equities remain modest, indicating that markets remain apprehensive.

"For now, this uncertainty is preventing a strong sell-off of gold."

Major-government bonds also ticked lower on Tuesday morning, nudging the 10-year US Treasury yield up towards new 9-month highs ahead of this week's $72 billion in new debt issuance.

Now the largest single holder of US Treasury debt – and overtaking the Chinese state – the Federal Reserve has begun concentrating its "quantitative easing" purchases on newly-issued debt, according to analysis by Bank of America Merrill Lynch.

Over 40% of Jan's purchases were of bonds issued in the previous 90 days, up from one fifth in Dec. and just 15% the month before that.

"When you're the largest buyer out there, when you replace China in terms of the size of your holdings of Treasury securities, that will happen," says Mitchell Stapley, fixed-income officer for the $22bn Fifth Third Asset Management group.

Buying Gold or physical Silver Bars today...?

Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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