Gold News

Gold "Moving Higher" as Euro Interest Rates Rise But Real Rates Stay "Dangerously" Negative

Physical Gold Investment prices held near yesterday's new all-time Dollar highs in London trade on Thursday, rising toward 3-week highs in Euro terms even as the European Central Bank made good on its promise to raise Eurozone base rates.

The ECB's move came despite a formal bail-out request late Wednesday from Portugal, currently under a caretake government and with a state budget deficit equal to 8.6% of gross domestic product for 2010.

Western stock markets ticked lower with crude oil, but government bond prices rose, nudging longer-term interest rates lower.

Claiming to be "ahead of the curve", ECB president Jean-Claude Trichet repeatedly stated his "core mandate" of providing "price stability for 331 million people" across all 17 nations in the single Euro currency union.

Set today at 1.25% per year, the cost of ECB loans for commercial banks remains sharply negative in real terms at less than half the pace of inflation pegged by the EuroStat data agency for March.

"We have lately been struck by the decline in gold's sensitivity to fiscal crises among Europe's peripheral economies," says the latest weekly commodities analysis from French bullion and investment bank Natixis, noting the recent "strengthening" of the Eurozone's EFSF stability fund.

"Investors no longer appear to be so concerned that defaults among Europe’s periphery will impact core countries...European investors have not been major buyers of gold since 2009, but given the volumes accumulated between 2008-9, there is increasing scope for some of this gold to find its way back onto the market."

Gold Investment through exchange-traded trust funds (ETFs) has fallen 4% by volume so far in 2011, according to Natixis' math. Bullish Gold Futures trading by speculative players has also fallen, with the "net long non-commercial" position dropping by 30% since Oct.

"Moms and dads are moving out, out of gold and into equities," reckons Jonathan Barratt of Commodity Broking Services in Sydney, speaking to Reuters.

"But our expectation for gold moving higher has more to do with inflationary concerns, I think, particularly in China."

Here in London, the Bank of England kept its key lending rate at a record low of 0.5% for the 25th month running on Thursday. On the latest UK data, that puts the real rate of interest – after Retail Price Inflation – at a negative 5.0% per year.

UK investors wanting to Buy Gold today saw the price rise £3 per ounce to £895, just shy of Wednesday's four-month highs.

Earlier in Tokyo, the Bank of Japan held its key interest rate below 0.1%, surprising analysts with a further ¥1 trillion loan ($11.7bn) to the country's earthquake-struck north-eastern region.

That takes the Bank of Japan's total monetary response to the March 11th disaster to the equivalent of $394 billion.

The Gold Price in Japanese Yen pushed higher to fresh 28-year highs in Tokyo trade on Thursday.

"The most important issue here is Spain," said Gabriel Stein, director of Lombard Street Research, commenting on the Portuguese bail-out for BBC radio on Thursday morning.

Spain, Greece, Ireland and Portugal make up less than 18% of Eurozone economic output, said Stein, but their banking sectors "are wholly dependent" on liquidity loans from the European Central Bank, accounting "for something like 60%" of the total.

"This [ECB rate rise] will hit them immediately."

Some 85% of mortgage borrowers in Ireland and Spain are on variable rates, according to the European Mortgage Federation. That rises to perhaps 99% in Portugal, says the FT's Alphaville blog.

"Permanently negative real interest rates distort world financial markets dangerously," writes Anders Åslund, a senior fellow at the Peterson Institute for International Economics.

Blaming the current "oil price shock" on sub-zero real rates across the world, "Central banks should face reality and raise their rates faster and higher," says Åslund.

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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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