Gold News

Gold Jumps vs. All Currencies as Cheap Money & "Crass Keynesianism" Seek to Revive the Debt Bubble

Spot Gold prices continued to rise in Asia and London early Thursday, breaking an 8-week high at $828 per ounce and reaching new all-time highs for British investors – now suffering the worst Sterling Crisis in 32 years.

Down by more than 20% from this time last year against the rest of the world's money, the British Pound has now fallen at its fastest rate since the UK begged an IMF Rescue in 1976.

The Labour government then embarked on a "deflationary package" to reduce public spending and debt, and to defend the currency.

Today's New Labour government, in contrast, has promised a record jump in public debt for 2009, while the Bank of England has slashed interest rates to an all-time low in a bid to repeat the record private-bank borrowing of 2007.

Thursday morning saw the Swiss National Bank (SNB) cut its key lending rate to just 0.5%.

The Russian central bank today devalued the Ruble for the fifth time in a month, widening its acceptable "trading band" after throwing more than a quarter of its foreign-money reserves at trying to defend the currency.

Overnight, the US Congress approved $14 billion in emergency loans to the "Big Three" auto-makers overnight, but the signature of President Bush is still required – and "Republicans will not allow taxpayers to subsidize failure," according to Senate minority leader, Mitch McConnell.

"The [UK's] switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking," said German finance minister Peer Steinbrück to Newsweek magazine yesterday, helping spark a new record high in the Euro vs. the Pound.

The Euro then rose to a 6-week high vs. the almighty Dollar today, breaking through $1.3200 as the US currency weakened against the Aussie and Canadian "commodity" plays.

"If the US Dollar continues its slide, the only way is up for gold," reckons Emanuel Georgouras, a trader at precious metals dealer Marex Financial in London.

That said, however, "It is hard to expect gold to continue its northward journey without some decent profit taking along the way."

Gold outpaced all major world currencies on Thursday, rising back to A$1,250 for Australian buyers and touching C$1,040 for Canadian investors.

The Gold Price in Euros rose to €630 an ounce, gaining almost 6% for this week so far.

Measured in the old German Deutsche Mark – the only major-economy currency to escape double-digit inflation during the late 1970s – gold ticked higher towards DM 40,000 per kilo, the key 25-year high first reached at the end of last year.

"All this will do is raise Britain's debt to a level that will take a whole generation to work off," added Germany's Peer Steinbrück of the UK's much-vaunted cut in value-added tax.

The slight cut from 17.5% to 15.0% may not stoke spending by over-borrowed consumers, who already owe 170% of Britain's annual GDP in household debt. But it will cost the Treasury at least £12.5 billion ($18bn).

Writing today at FT.com, Philip Stephens notes "a chilling sense of déjà vu" in Germany's comments, comparing them with Helmut Schlesinger's advice to journalists in Sept. 1992 that Britain's attempt to keep Sterling inside the Exchange-Rate Mechanism – the trading bands which preceded the launch of the single Euro currency were doomed.

"It was a self-fulfilling prophecy. Within 48 hours Sterling had been forced out of the ERM by a wall of speculation."

Meantime on the stock market today, London's FTSE index held flat as Frankfurt's Dax recovered from an early 1.5% slide.

German and US bond yields fell back as prices bounced from yesterday's dip.

Crude oil leapt by 5%, repeating Wednesday's huge volatility, after the International Energy Agency (IEA) said it expects the Opec oil cartel to actually action the output cuts it's already agreed to try and stem falling prices in the face of a collapse in new demand growth.

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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