Gold News

Gold Slips as Dollar Rises, Stock Rally Fades on "Flawed" Banking Rescue; Deflation Failure Spreads to UK from US & Europe

Gold Prices slipped to a four-session low beneath $920 an ounce early Tuesday – up more than 6% for 2009 to date, but 8% south of the $1,000 top hit 5 weeks ago – as world stock markets failed to extend Monday's strong gains.

Wall Street's S&P index gave back a quarter of yesterday's 7% rise in the first hour of trade, and the Euro also fell – bouncing off $1.3500 – alongside crude oil and base metals.

Only the British Pound rose vs. the Dollar on the currency market, pushing the Gold Price in Sterling down to a six-week low, after new data showed the cost of living in the UK avoiding deflation in February.

Already running at 0.4% month-on-month in the Eurozone and United States – more than 4.9% annualized – official Consumer Price inflation in the UK rose 0.9% month-on-month.

The old Retail Price measure, which analysts expected to give a negative reading for the first time since 1960, showed monthly growth of 0.6% and annualized growth of 12% excluding mortgage repayment costs.

"In the presence of all the macroeconomic and financial forces that can provide gold with the basis for a significantly higher price terrain," says the latest Gold Investment analysis from London dealers Mitsui, "we remain in the bullish camp for gold.

"The lack of 'traditional' [jewelry] buying in this market is a worry, but the force of the off-take from the Gold ETF community is too big a trend to fight," today's note goes on, also citing "the return of the inverse relationship" between gold and the US Dollar.

"The Geithner plan is very badly flawed," said Nobel award-winning economic Joseph Stiglitz of the US Treasury's new Public-Private Investment Program this morning.

Underwriting the purchase of $1 trillion in bad debts from US banks offers "perverse incentives" for hedge funds and leveraged speculators, he told a Reuters correspondent at Credit Suisse's Asian Investment Conference in Hong Kong.

"Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."

Federal Reserve chairman Ben Bernanke today told a Congressional committee that he wanted to stop insurance giant AIG paying staff bonuses – but was advised against it by lawyers – before the row over its $165 billion tax-funded rescue erupted in Washington.

"By financing a large part of the [new $1 trillion toxic debt] purchase with a non-recourse loan," writes Princeton economist Paul Krugman in his op-ed column for the New York Times today, "the government is in effect giving investors a put option to sweeten the deal.

"[Yet] administration officials keep saying that there's no subsidy involved, that investors would share in the downside. That's just wrong."

President Barack Obama is due to hold a press conference later today, explaining Treasury secretary Tim Geithner's plan to the nation.

US stocks opened the day lower, down 0.8% on the S&P index, after rising at their fastest pace since Nov. on Monday's news.

Yesterday the volume of Gold Bullion hoarded on behalf of stockholders in the New York-listed SPDR exchange-traded trust shrank for only the second day so far this year.

Down by less than one-third of a tonne, however, the hoard remained 42% larger from Jan. 1st and held above 1,114 tonnes.

"The signals for a longer-term gold upturn are weakening slightly," notes Phil Smith in his analysis for Reuters India Technicals today.

"Overall, the short-term chart is giving somewhat mixed signals.

In the commodity markets on Tuesday, crude oil dropped a dollar to $52.70 per barrel, while base metals fell, led by aluminum.

Barclays Capital – the London-based investment bank – today told clients that "All anecdotal evidence points toward continued weakness in demand, as does the data."

US government bonds held flat meantime, despite the drop in equity prices. British gilts fell hard on the UK inflation data, driving the yield offered by 20-year bonds back above 4.0%.

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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