Gold News

Gold Bounces Off 5-Week Low as Fed Sticks, Asset-Rally "Challenged", Financial Crisis Leaves "Legacy of Too Much Debt"

Gold bounced off a new 5-week low to the Dollar overnight in Asia on Thursday, rising in London trade to match a 0.5% gain in world stock markets.

Earlier dropping as the European single currency sank through $1.40 to its worst level since July, "[Gold] inevitably followed the Euro's rebound," said one Hong Kong dealer this morning.

"Gold was oversold...It spiked up off the [$1082] low on short covering and bargain buying."

Government bonds were little changed worldwide after the US Federal Reserve kept Dollar interest rates at zero and confirmed that's where they'll stay for "an extended period".

Noting the "stunning" gains in precious and base metal markets during the last decade and 2009 in particular, "There surely is some truth in the view that soaring prices were a consequence of cheap money sloshing around the world’s financial system," says today's Metals Monthly for Fortis Nederland Bank.

"One factor was the weak trend of the US Dollar," note the report's authors, London consultants the VM Group.

"But...clearly the powerful economic growth of China and other emerging countries has fuelled very strong [metals] demand, and investment interest has taken note and latched onto commodities."

Outside hard assets, says the VM Group, "Investors did not have much else to cheer" over the last decade.

"The S&P 500 fell 25% over the decade whilst the wider FTSE-World index lost 13%."

Gold Prices rose almost four times over between 2000 and the end of 2009. Lead rose 388% and copper added 292%.

"For many investors, silver represents the cheaper alternative to gold for hedging against financial markets and other risks," the Financial Times quotes Eugen Weinberg, head of commodity research at Commerzbank, one of the world's three largest bullion banks.

"All in all, [Commerzbank's analysts] think the price of silver will rise further in 2010, reaching $20 an ounce by year-end, due to a recovery in industrial demand and ongoing strength in investment demand."

Near-term, however, Wienberg sees silver continuing to amplify movements in the Gold Price, perhaps dropping as low as $15 per ounce on sustained pressure.

Across equity and commodity markets, "Asset prices are being challenged on many fronts," writes Steven Barrow, chief currency strategist at South Africa's Standard Bank in London today.

Noting that "Central bank tightening is coming even if we think it will be slower than the market is priced for," Barrow predicts a further rise in the Dollar – most notably vs. the Euro – plus a global move towards "trading restrictions of some sort", as well as political strains on the Eurozone "creating real questions about defaults, bailouts and even [monetary union] pullouts.

"The key question is whether this is all boiling up to some sort of monumental risk-aversion surge of the sort we saw after Lehman failed. Fortunately, [Standard] do not think that it is" – thanks to central banks standing ready to cap "any blow-out in interbank [interest] rates" such as that starting in Aug. 2007 and peaking in late '08.

"If that were the end of the story, it would be a happy ending," said Andrew Haldane, executive director for financial stability at the Bank of England in a speech last night.

"But there are good reasons for believing this story has some way to run...The lasting legacy of this crisis is too much debt held by too many sectors against too little capital."

The Bank of England itself has bought 20% of the UK government's entire debt outstanding, using £200 billion of new money created by its Quantitative Easing scheme – and now all spent.

"If the Bank of England decides not to continue with [gilt] purchases," says Terry Stheeman, chief executive of the UK Treasury's Debt Management Office, "then you could, in theory, see yields rising because of the changing supply and demand dynamic."

2009 saw the UK government borrow £193bn, today's FT reports – "more than the total of £172bn borrowed [through] the Debt Management Office in the first seven years following its launch in April 1998."

"Gilt yields are close to historic lows," notes Stheeman, "much lower now than they have ever been."

Bill Gross, head of the giant Pimco bond management group, warned this week that "Gilts are resting on a bed of nitroglycerine" thanks to the UK having the developed-world's "highest debt levels and a finance-oriented economy...the potential to devalue its currency [and] artificially influenced...interest rates."

For fixed-income investors and savers, says Gross in his latest monthly Outlook, "The UK is a must to avoid."

Sterling rose early Thursday, however, jumping to its best level vs. the Euro in 5 months and squashing the Gold Price in British Pounds to £670 an ounce.

The lowest price for UK gold buyers since mid-Nov., today's drop represented a 9% discount to early Dec.'s record high.

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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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