Gold News

Gold Drops, Stocks Tumble on Swine-Flu Fears; China's Gold Buying "Re-Monetizes" the Metal; Wall Street Discounts Inflation

Spot Gold Prices slumped for the third time in 24 hours as the US opening drew near on Tuesday, sinking 3.5% from yesterday's start to a four-session low of $886 an ounce.

Crude oil fell below $49 per barrel, while government bonds were bid higher, pushing the yield offered by 10-year US Treasuries to 2.90%.

World equities lost well over 2% after the World Health Organization (WHO) said "containment is not a feasible operation" now the Mexican outbreak of swine flu has gone global.

"There was a massive sweep lower as stop-losses were triggered," reports Mitsui, the precious metals dealer, of the overnight slump in Asian Gold Prices.

"Gold recovered fairly quickly but with a very bearish sentiment emerging as early Europe started to come into the office."

The US Dollar also came under pressure today, slipping back to $1.30 per Euro and $1.4650 per Pound.

In New York, the Wall Street Journal said the two largest US banks must add "billions" to their capital reserves after last week's Federal Reserve stress-test of their balance sheets.

Bond insurer Syncora yesterday suspended payments to policy-holders after a $2.4 billion deficit led the New York Insurance Dept. to demand it cuts its exposure to corporate default.

"For 5,000 years gold was a monetary asset, a financial asset, and a commodity," noted Jeffrey Christian of the CPM metals consultancy in New York last month. "Since the 1960's gold has been removed as a basis of the international monetary system."

But reviewing last week's news that China's Gold Hoard Rose 75% in the five years to end-2008, CPM now thinks it important that the 454-tonne purchase were initially made by the non-central bank State Administration of Foreign Exchange (SAFE), and only recently transferred to the People's Bank of China (PBOC).

"CPM analysts believe that the confirmation of the Chinese move to place the gold in its official reserves indicates the extent to which gold is being rehabilitated as a monetary reserve asset," says MineWeb today, "not only by the Chinese monetary authorities but by central bankers around the world.

"It suggests that monetary authorities are looking at gold as a monetary asset with greater interest than at any time since the 1960s."

Reviewing the same development in China's $2 trillion foreign exchange reserves, "China is currently the biggest gold producing nation in the world," writes Dr.Edel Tulley at Mitsui in London. "[But] the fact that this sale amounted to a purchase of domestic metal [direct from local miners] matters little.

"It all feeds it less supply of metal on the market. And in very simple economics, this should feed into a higher Gold Price."

Meantime for private investors, "Even if inflation isn't a problem now, massive government debt is one very good reason to fear inflation in the long term," reports John Waggoner for USA Today.

"Currently, the United States' government has $11.2 trillion in outstanding debt, up from $5.7 trillion at the end of 2000. Furthermore, the government's efforts to prop up the banking system will add billions more to the total."

Pointing to Treasury Inflation-Protected Securities (TIPS), these "long-term IOUs issued by the government have an inflation kicker," Waggoner adds. But at present, "The yield on 10-year TIPS reflects Wall Street's belief that inflation is no danger.

"It implies an inflation rate of about 1.3% for the next 10 years."

Last month's data showed US consumer prices rising at a 4.7% annualized pace during the first quarter of 2009. Excluding fuel and food – the Federal Reserve's preferred measure – prices rose 0.2% month-on-month in March.

Over in Germany, where consumer price inflation edged higher this month according to new data today, European Central Bank policy-maker Nout Wellink tells the Frankfurter Allgemeine Zeitung paper that the ECB should "discuss" sub-1% interest rates at its next meeting.

"That China has bought gold doesn't surprise me," Wellink added, vowing to renew the Central Bank Gold Selling Agreement this coming September.

"This is a positive development and I appreciate the move."

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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