Gold News

Gold Jumps as Dollar Falls, Eurozone Prepares "Unconventional" Policy for Near-Depression Level Unemployment

The price of gold leapt to unwind all of last week's losses for US investors Tuesday morning in London, as the US Dollar fell hard on the currency market.

Retouching a one-week high for UK and European buyers – even as the Euro moved back above $1.34 and the British Pound broke its best level in 2009 at $1.51 – gold rose alongside Asian and London stocks, which added to Monday's sharp gains on Wall Street.

"I would say that the weaker Dollar has supported gold," Phillip Futures analyst Adrian Koh told Reuters in Singapore overnight, and "I think today or the next will be key for gold as we are hovering near key downtrend resistance around $910-$915.

"Unless we are able to hold above these levels, gold could still very much hover around these levels for some time."

Crude oil today edged back after jumping towards $55 per barrel on Monday, but held 21% better for 2009 to date.

Bond prices were mixed, meantime, falling for UK and US government debt but rising to push German bund yields lower ahead of Thursday's European interest-rate decision.

"We expect a 50 basis points rate cut" from the European Central Bank, says today's precious metals note from Standard Bank, "and possibly some non-conventional policy measures [which] would benefit gold should they be big and bold.

"But the ECB is usually conservative and very conventional," it adds.

Returning from the May Bank Holiday, the FTSE100 here in London today jumped 2.9% to its best level since January.

French and German shares held flat, however, after new data showed factory gate prices falling by 3.1% year-on-year across the 16-nation Eurozone, adding to pressure on this Thursday's central-bank policy vote.

March saw unemployment in the Eurozone rise for the eighth month running to reach a 8.9%, as Spain joined Lithuania and Latvia with near-Depression rates of joblessness just shy of one-in-five.

"Gold had a strong move to the upside yesterday with liquidity reduced due to the London holiday," said Mitsui in its morning report. But "in comparison to 2008 activity, the current net position [of speculative traders] remains somewhat constrained.

"Despite periodic explosions both to the upside and downside, the metal remains locked within an $880-906 trading range."

Latest data from US regulator the CFTC show speculative positions in Gold Futures and options creeping higher last week, but the outstanding volume of leveraged bets remains one-third below the Jan. 2008 record.

"We have seen good physical selling with gold above $900," Standard Bank adds, "and this seems to be the current trend.

"Equity markets have almost wiped out year-to-date losses [and] while we doubt this momentum in equities is sustainable, any safe-haven asset like gold – which provides no yield – will struggle to compete against the type of performance equities have been delivering."

Leaked reports from the Federal Reserve's "stress test" of 19 major US banks meantime said 10 of them will indeed require extra capital.

The list is said to include Wells Fargo – up 23% on Monday after "Sage of Omaha" Warren Buffett called the bank "fabulous" at the annual Berkshire Hathaway shareholders meeting.

"The challenge for us on the Federal Open Market Committee will be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation," said Richmond Fed president Jeffrey Lacker in a speech on Monday.

But also forecasting an end to the US recession for later 2009, Kansas City Federal president Thomas Hoenig told an audience in New York that the United States still has "a ways to go before markets will function effectively without government assistance."

Insurance giant AIG will post its sixth quarterly loss on the trot this week, an un-named "source" told the newswires overnight, adding to the $100 billion loss which forced a huge cash injection from the US government last September.

"The Fed, Treasury and FDIC are already backstopping or supplying 70% of the entire banking system’s balance sheet," says senior financial strategist James Quinn at Minyanville.

"The government is trying to convince us that the banking system is sound, and the recovery is underway. But the grim reality is still clear."

"Drafting a long-term strategy to normalize the world financial system is of great importance," said ECB council member Athanasios Orphanides – head of the Cyprus central bank – on Tuesday morning.

"The vicious cycle is not easy to overcome without drastic conventional and non-conventional measures," he went on, raising expectations that Quantitative Easing of the ECB's balance-sheet will accompany this week's rate cut.

But looking at the longer-term costs of the US bank rescue – and confessing that Berkshire Hathaway's 10% loss in 2008 didn't "cover [himself] with glory" – "My guess is the ultimate price will be paid by a shrinkage of the value of the Dollar," said Warren Buffett at this weekend's much-followed AGM.

The biggest losers amidst the inevitable inflation to come, Buffett said, would be bond and other fixed-income investors.

Meantime in Venezuela, No.15 in the world table of gold-hoarding central banks, the government yesterday doubled the volume of Gold Bullion that local miners must offer to the central bank as it seeks to grow its hard-money reserves from the current 356 tonnes.

Now 70% of all gold produced in Venezuela, clocked in 2008 at some 18 tonnes, must be sold to domestic buyers. Fully 60% must first be offered to the central bank – up from the previous 20%.

"It’s a political decision," said Andre Agapov of active Venezuelan junior, Rusoro Mining (listed in Toronto), to Bloomberg.

"Why ship it from Brazil when you could buy it from local producers?"

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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