Gold Nears 11% Monthly Jump Amid "Deflation Scare", Deluge of New Government Debt

Spot Gold prices continued to hold steady early Friday in London, nearing their fourth weekly gain in succession vs. the Dollar and standing more than 11% higher from the start of November.

That marks the sharpest one-month gain for Dollar investors since gold's two-decade bear market ended in Sept. 1999.

Versus the British Pound, gold in Nov. added almost 17%, its sharpest gain in more than 25 years.

"Hard assets for hard times," reckons Frank McGhee at Gold Futures dealer Integrated Brokerage Services in Chicago.

"Even with all the money central banks have thrown at the financial system, it's not enough to stop systemic risk. People are looking for something that's going to go up, and that's gold."

Japan today reported a sharp drop in industrial output, as well as rising unemployment, while the jobless rate in the 15-nation Eurozone rose to 7.7% in October, new data showed.

Consumer prices meantime fell by 1% month-on-month according to the official CPI measure, meaning "ECB interest rates will fall to a record low next year," according to Jennifer McKeown at Capital Economics.

"It is strange that Gold Prices should be rising during a deflation scare," says Steven Major, head of fixed-income strategy at HSBC in London.

"As a store of value, Gold understandably performs well in times of uncertainty and fear of higher inflation."

But noting how the flood of government money aimed at averting depression makes concerns about falling prices overdone, "At some stage, the market will look beyond the deflation discounted for 2009 and to the risks of rising inflation facing bond buyers by 2010-11," Major told clients in a note Thursday.

Now standing 1.3% higher from last week's close at $811 per ounce – and with New York all-but shut for the Thanksgiving holiday – Gold Bullion has moved inside a $10 band since Tuesday's finish in London, its tightest range in percentage terms for more than five years.

British investors wanting to Buy Gold have meantime seen the price slip 3.8% from Monday's near-record high at £550 an ounce.

The Gold Price in Euros steadied today at €630, one per cent below last week's close.

"Everyone has skipped [the] story and read the conclusion," claims Hugh Hendry, co-founder of the Eclectica hedge fund in London and a self-certified contrarian, writing in today's Daily Telegraph.

"They fear financial anarchy. Gold Coins are sold out. Everyone is in. And yet the price of gold has fallen this year. So, for now, I would stick with [UK] bonds.

(The Gold Price in Dollars is in fact little changed from 12 months ago, however. For Sterling investors weighing a choice between Gold and government gilts, the price has gained 23% from New Year's Day.)

"With the Bank of England likely to follow the Fed and slash rates to 1%," Hendry explains, "I believe we could see gilt yields below 3%. And I promise you that if bond yields broke 3% there would be a stampede to buy."

(Twenty-year UK gilt yields have offered just 0.3% annual income in 2008 after inflation. The previous four-decade average – including the wildly negative real gilt yields of the late 1970s, the second time a Labour government took Britain to the verge of bankruptcy and forced A Collapse in the Pound – was 2.4%.)

Whether it arrives or not, a stampede of bond-buying will be essential to UK policy between now and 2015, according to the Buttonwood column notes in today's Economist. Because "the British government plans to issue £369 billion ($585 billion) of debt over the next seven years, almost as much again as the face value of outstanding conventional gilts, which stands at £460 billion.

"Citigroup is [also] forecasting a 40% increase in bond issuance in the Eurozone and a doubling of issuance in America...Will the appetite for bonds continue as governments churn out more debt?"

Writing in today's Financial Times, "A creditworthy government can shift excess debt from the private sector on to the backs of taxpayers," notes Martin Wolf. "An uncreditworthy government cannot.

"If the cost of debt becomes too high, the latter will be forced into default, either openly or via inflation. In the UK's case, inflation would be triggered by a flight from Sterling."

Reporting the "horrific numbers" in this week's Pre-Budget Report from the UK Treasury, "the public sector's net borrowing will jump from 2.6% of GDP last financial year to 8% in 2009," he says.

Today the UK government – first government to support a failed bank (Northern Rock) during this global crisis – took majority control of the Royal Bank of Scotland, owning almost three-fifths of the group after stockholders bought just 0.2% of a £20 billion emergency cash raising ($31bn).

The FTSE100 index ticked lower, meanwhile, as Tokyo's Nikkei index closed Friday 7.6% higher for the week despite news that Japanese industrial output fell at the fastest pace in five years during October.

Car production shrank nearly 7% month-on-month, "with standard size vehicles falling nearly 15%," reports Mitsui – denting platinum demand for auto-catalysts.

"Platinum-metal flow into the United States this year is some 30% behind 2007 activity," the precious-metals dealer adds in its PGM Trade Update today.

Crude oil meantime slipped to $53.70 per barrel early Friday and base metals sold off sharply, cutting lead futures in London by 6.7%.