Gold News

Gold Caught Between "Recoveryitis" & Safe-Haven Buying as China Fears Inflation from "Extraordinary" Central-Bank Easing

The price of Gold rose inside a $10 range early Wednesday in Asia and London, recording an AM Gold Fix at $903.50 per ounce as emerging-world stock markets rose yet again, adding 41% from March's low.

Base metals and energy prices also rose, with crude oil breaking back above $54 per barrel as government bond prices fell.

That pushed 10-year US Treasury yields higher above 3.0%, as 10-year UK gilt yields hit 3.56% – rising sharply from mid-March's all-time record lows beneath 3.0%.

"Gold caught a lot of people out yesterday as what looked like a break out of the recent consolidation pattern turned into a sharp reversal as gold closed on the lows," notes London dealer Mitsui.

"The market needs to close above $905 to give a positive signal. If not, the consolidation pattern remains firm."

As world equities rose early Wednesday – with Hong Kong shares gaining for the fifth session running to hit a 7-month high – "There's a general buying of commodities, including gold, that's offsetting the usual safe-haven buying trend," said Dan Smith at Standard Chartered in London to Bloomberg this morning.

"Funds are generally looking to increase their exposure to commodities."

"The relationship between the Gold Price and what we might term signs of economic optimism – such as rising share and commodity prices – has not always been consistent," agrees the latest Asian Metals Monthly from Virtual Metals, published for Fortis Bank, "and there have been many occasions where gold has been boosted by general exuberance."

Casting doubt on the "green shoots" rally in global markets, however – and noting that gold's mid-April falls were due to a "bout of recoveryitis" in risk assets – the team believe the current "see-sawing [in Gold] is likely to continue but with a negative trend unless there are clear signs of renewed economic woe."

Overnight in the US, Bank of America was rumored to need as much as $34 billion in extra capital following the Federal Reserve's "stress tests" of 19 top banks

A Bank of America spokesman declined comment, but together with Monday's leak that 10 leading banks will be required to raise additional cash, press coverage of the stress tests "negates the whole point" according to Jaidev Iyer, ex-risk manager at Citigroup and now a bank-risk analyst.

New data from real-estate website Zillow meantime claimed that one-in-five US mortgages is now in negative equity, with the outstanding debt greater than the potential re-sale value at today's prices.

Average US Home Prices fell 14.2% in the last 12 months, Zillow says in its latest Real Estate Market Report, covering 161 urban regions. The loss to home-owner wealth since New Year's Day is put at more than $700 billion.

Across the Pacific, the People's Bank of China forecast a return to strong economic growth in 2010, but warned that "As more and more economies start to implement extraordinary monetary policies like Quantitative Easing, risks of major currency depreciation may grow."

Thursday's interest-rate decision from the European Central Bank (ECB) – expected to see a new record cut to just 1.0% – has been widely trailed by ECB policy-makers to include "non conventional" measures, taken to mean creating money to buy long-dated government bonds and thus inject cash into the 16-nation economy.

"[But] if central banks cannot mop up the huge liquidity when economic recovery comes through," warns the People's Bank of China today, "asset bubbles and inflation may once again be triggered."

Currently hoarding base metals such as copper at multi-year lows, the People's Bank grew China's Gold Reserves by 75% in the last five years, taking it to No.5 in the league table of gold-owning central banks.

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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