Gold News

Gold Rally Fails But "Uncertainty" and "Thinking the Unthinkable" on Sovereign Default "Makes Gold Attractive"

Gold gave back yesterday's 1.4% rally on Tuesday morning in London, drifting down to Monday's start near $1113 an ounce as world stock markets slipped and the US Dollar rose on the currency market.

The Euro fell to a fresh 11-week low after the ZEW survey pegged economic sentiment across the 16-nation currency union at a four-month low.

Consumer-price inflation leapt in the UK last month, new data showed, wiping out average pay settlements for 2009.

Austria's Die Presse newspaper said Viennese regulators are closely watching the country's fourth-largest bank, OeVAG, following the failure and nationalization of Hypo Alpe Adria on Monday.

"There is still a great deal of uncertainty on unemployment and economic growth so it makes sense to diversify into gold," says Ian Henderson, head of J.P.Morgan's Natural Resources Fund.

"I think investors should focus on what is happening to currency as that is the prime mover."

"Given the significant challenges ahead, a muted and fragile recovery appears more likely," agrees Ted Scott, director of UK strategy at the giant F&C group, also speaking to The Daily Telegraph.

"Gold will remain attractive in such an uncertain environment."

"Whatever happens in the short term, in a period of financial uncertainty on today's scale, I just don't think [investors] can be without a proper precious metal," says Merryn Somerset Webb, editor-in-chief of MoneyWeek magazine, writing in the Financial Times.

This morning Standard & Poor's downgraded Mexico's sovereign debt rating, matching Moody's downgrade of late last month.

Romania's finance minister said he expects to get €1.5 billion of a total €20bn loan from the International Monetary Fund soon, delayed until last month's election by what the Financial Times calls "political turmoil".

The Italian government said it will hold a vote of confidence to approve its 2010 budget, while the Greek government opened its 2010 budget by freezing defense spending for two years, abandoning inflation-linked pay increases for public-sector staff, and imposing a 90% tax on large banking bonuses.

The Athens stock market lost 1.3% on the news, while Greek government bonds fell yet again, driving the yield offered above 10-year German Bund yields up to 255 basis points (2.25%).

"Many [top-rated] Aaa governments, starting with the UK and the US, cannot afford another financial crisis at current rating levels," says the Moody's rating agency in its new Outlook 2010.

Nor will "most governments have the luxury to wait [before they] start cleaning up public finances...The issue is ultimately: could very rich countries default on their debt?

"Even though this is not a pressing issue for 2010, we suspect investors will increasingly try to think the unthinkable."

Back in the wholesale Spot Gold market on Tuesday, the AM Fix in London came in 6% and almost 9% below Dec. 3rd's record peaks against the British Pound and US Dollar respectively.

Eurozone investors now ready to Buy Gold saw the price tick higher to €766 an ounce, a level first broken in Feb. 2009 and again five weeks ago.

"Gold and silver have stabilized," agree several bank analysts in client notes, pointing to "support" at yesterday's lows but also noting that physical trading is now "lethargic" ahead of the Christmas and New Year holidays.

For US investors, the Gold Price in Dollars has averaged $967 an ounce so far in 2009. Last week HSBC lifted its average forecast for this year to $990 – up from $925 – and predicted an average price of $1150 for 2010, up from $950.

Bank of America Merrill Lynch sees gold at $960 an ounce in 2009 as a whole, rising to $1110 in 2010.

Goldman Sachs bucks consensus forecasts by predicting a further rise in 2011, pegging the average Gold Price at $1425 an ounce, up from $1265 next year.

"With the US Federal Reserve expected to keep its short-term nominal interest rate target near zero through 2011, we expect the low US real interest rate environment to continue to provide strong support for Gold Prices," says the former investment bank.

"However, as we also expect US inflation to remain subdued, we expect Gold Prices to come under significant downward pressure once the US economic recovery strengthens and the US Federal Reserve begins to raise interest rates."

US interest-rate futures now put a 50-50 chance on the Fed raising its key interest rate – currently pegged between zero and 0.25% – by at least 0.25% before June.

"Monetary policy should not be subject to political influence," said Democrat Representative Brad Miller in an interview yesterday. "But my own view is that before we have pulled out of the decline that we're in...I don't think the Fed needs to raise interest rates."

"There is a need for political courage, but it is really lacking," says Professor Allan Meltzer, a Fed historian at Carnegie Mellon University in Pittsburgh, speaking to Bloomberg.

Delaying a rise in interest rates means "we will end up with fairly sizable inflation, not immediately but over a couple of years," he believes.

"The Dollar will continue to sink."

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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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