Gold News

Gold Slips But "Seasoned Investors Buying" as US, UK and Japan Debase Money to Boost Assets & Credit

Gold Prices continued moving in lock-step with the US Dollar early Wednesday, diving to a one-week low of $901.50 an ounce as the New York opening drew near.

Crude oil slipped to $49 per barrel from a 3-month high, while government bonds rose, pushing the yield offered by 10-year US Treasuries back below 3.0%.

World stock markets were mixed, with the Tokyo Nikkei crawling to a 5-week high after the Bank of Japan held its key interest rate at 0.1%.

The BoJ also raised its monthly target for buying government bonds in a bid to boost the money supply and support asset prices to ¥1.8 trillion ($18.3bn), up by more than a quarter from Feb's purchases.

The US Federal Reserve, meeting later today, was also expected to detail its current "asset purchase" program, while keeping its target rate below 0.25%

US inflation, in contrast, rose by 0.4% between Jan. and Feb. said new data released Wednesday morning – an annualized pace of almost 5%.

"As the world deals with the global economic crisis, the value of gold – as the only true 'hard currency' – is coming to the fore," says Mark Cutifani, head of world No.4 gold mining group AngloGold Ashanti, "as evidenced by the investment choices of some of the world's most seasoned investors."

Hedge-fund legend John Paulson – who reportedly made $15 billion betting against subprime mortgages during 2007 – yesterday paid $1.3 billion for an 11% stake in AngloGold Ashanti.

"At $950 per ounce, all of the gold in the world would be worth $4.887 trillion dollars," wrote J. Kyle Bass, managing partner of the $620m Hayman Advisors fund, in a client note last week.

"On the other hand, we estimate there is roughly $60 trillion of fiat money (including currencies, deposits, savings, money markets and CDs) in the world."

Pointing to the various "asset purchase" programs now running in the United States, Japan and the UK, "Governments are caught with so much credit market leverage and losses, we believe that they will – in true Keynesian color – attempt to print  their way out of this mess," Bass went on.

"If this many people do you think will begin to question the value of paper currency when it is being debased?"

New data this morning showed the US trade deficit shrinking to a five-year low at the end of 2008, down to $133 billion from the summer's $181bn outflow of cash to foreign suppliers.

Here in London today – where new figures said UK unemployment passed two million last month, the worst reading since the New Labour party took power in 1997 – minutes from the latest Bank of England policy meeting showed that the 9-member committee was unanimous in voting for both a record rate-cut to 0.5% as well as for buying private and government debt with £75 billion of freshly created money.

"There isn't enough balance sheet capacity [in the banking sector] to allow world economies to grow," claimed John Varley, head of London's Barclays Bank at a parliamentary enquiry on Tuesday.

Seeking to avoid the government taking a stake in the bank's equity, but still wanting to benefit from the UK's new "toxic asset" guarantee scheme, Barclays yesterday offered its iShares exchange-traded fund business for sale.

Saying that a return to the securitized debt system which ground to a halt in mid-2007, "The orthodoxy was that the originate-to-distribute model would have a significant benefit to risk diversification," Varley told law-makers.

"Banks are dangerous institutions," said Bank of England chief King at a City speech last night. "Forty years ago, the clearing banks in London held around 30% of their assets in short-term liquid instruments. Today that liquid assets ratio is about 1%.

"For the major UK banks, almost 25% of customer loans are now funded by short-term borrowing in wholesale markets. At the turn of the new century it was close to zero."

"Distinctive it may have been; sensible it was not," King went on. "HBoS and RBS paid the price as the availability of this funding dried up, and not one of the building societies that de-mutualized in the 1980s and 1990s in order to expand beyond the constraints of their deposit base has survived as an independent entity."

Dr.King has been governor of the Bank – charged with monitoring UK banking risk – since 2003. Before that, he was deputy governor from 1998.

On the currency markets this morning, the British Pound bounced vs. the Dollar but fell to a one-month low against the Euro, down by almost one-fifth in the last six months.

The Gold Price in Sterling meantime ticked down to £645 an ounce, an 8% discount to Feb.'s new all-time highs.

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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