Spot Gold Prices shot higher to record a six-week high on Wednesday as Ben Bernanke spoke to Congress on the US economy, and global inflation data pointed to a rising cost of living ahead.
Up by 2.7% in the year to June, the US consumer price index outpaced Wall Street forecasts. Excluding fuel and food – the Fed's preferred measure – the CPI rose by 2.2% last month, a rate of inflation that may prevent the Fed cutting interest rates to bail out the ailing subprime US mortgage market.
Late on Tuesday Bear Stearns – the fifth largest securities firm in the US – told investors in its two failed mortgage-bond hedge funds that they may get back little or nothing after "unprecedented declines" in the funds' assets.
Those assets themselves, however, were unprecedented in their complexity and high-risk gearing, as this story explains...
"This is a watershed," said one credit ratings manager to Bloomberg today. "A leading player, which has honed a reputation as a sage investor in mortgage securities, has faltered. It begs the question of how other market participants have fared."
Meantime on Capitol Hill, Ben Bernanke told Congress that inflation "remains the predominant policy concern" for the Federal Reserve. After 17 rate hikes in the last two years, however, the growth in lending and debt has expanded the US money supply by more than 10% according to Capital Economics, the highly respected London-based research consultancy. Indeed, the old M3 measure of US money supply – abandoned by the Federal Reserve itself at the start of 2006 – has been moving sharply higher for the last 18 months.
"The US economy appears likely to expand at a moderate pace over the second half of 2007," Dr.Bernanke went on in his semi-annual testimony before Congress today, "with growth then strengthening a bit in 2008."
The forex market coupled this downgrade in Bernanke's GDP forecast with news that US building permits fell dramatically last month – down 7% from May and 5% below consensus expectations – and sold the Dollar straight back towards Tuesday's record low against the Euro at $1.3810.
The Dollar also sank to a fresh 26-year low versus the Pound Sterling at $2.0510, yet these moves in the currency market failed to cap the Price of Gold for either European or British investors wanting to Buy Gold Today. Gold shot 0.8% higher against both currencies to a four-week high of £330 and €487.50 per ounce respectively.
Warning on the serious risk of stronger global inflation to come, "we haven't seen anything on this scale before," said Martin von Lampe, an agricultural economist in Paris at the Organization for Economic Cooperation and Development (OECD) to Bloomberg earlier this week. The International Monetary Fund (IMF) blames a surge in global demand for the 23% rise in worldwide food prices seen since the start of 2006.
"Investors are likely to push up the gold price to $850 an ounce in 2008," said Philip Klapwijk, head of the highly respected GFMS consultancy, to a conference in Beijing earlier today. He believes the Gold Market could now bounce to $700 and above before the end of this year.
If the world's central banks fail to raise interest rates sharply, however, the threat of inflation may drive a much sharper hike in the Price of Gold far sooner than that.
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