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Gold "Needs Direction" as Euro-Correlation Turns Negative, World's No.2 Buyers "Losing Purchasing Power" in Cash

Gold Prices bounced off yesterday's 2-week low for Dollar investors early Thursday in London, but fell further against Sterling and Euros as world stock markets again held flat together with commodities.

Government bonds slipped, pushing the yield offered by 10-year UK gilts up to a 2-week high of 4.14%.

Ten-year US Treasuries offered 3.74% p.a., more than three-and-half percentage points above 6-month debt.

"With a US rate hike likely within the next six months, gold may be in for a tough time if it does not find some direction shortly," reckons one London dealer in a note.

"There are lot of buy orders below $1100," counters Pradeep Unni, senior analyst at Richcomm Global Services in Dubai, speaking to Reuters.

"Gold will continue to fight bearish pressure if we don't find any [political] clarity with respect to Greece and neighboring nations."

Greek public services were once again closed by a national strike on Thursday in protest at the government's "austerity" budget.

Typically moving together against the Dollar, gold and the Euro split apart when the Greek budget crisis first broke at the start of Feb.

Initially seeing Dollar-Gold Prices rise while the Euro/Dollar exchange rate fell, gold now stands flat from the start of March, while the Euro has added 2¢ to $1.3650.

On a rolling one-month basis, the daily correlation of gold and the Euro – averaging a strong +0.51 over the last decade – fell this week to minus 0.35, its most negative reading since March 2009.

"Gold Prices in Euros and Sterling [last week] reached record high levels, suggesting the market is worried about falling currency values," notes the March Metal Matters report from bullion bank Scotia Mocatta.

"Funds and ETF investors have started to buy into the price rebound, which suggests another significant up leg could be starting.

"Given the latest fears in the market are about sovereign debt, it seems as though Gold Prices could have further to climb."

Today in China – a close second to India as the world's largest private buyer of Physical Gold – new data today showed consumer-price inflation jumping in Feb. as food prices leapt more than 6%.

"A growing number of households will realize their deposits in the banking system are losing purchasing power," says Deutsche Bank's chief China economist, Jun Ma, "because the real interest rate is now negative."

Chinese real interest rates – accounting for inflation – were last below zero in late 2006.

Real US interest rates sank below zero for the third time in 7 years last November. Cash savers in the UK have lost real purchasing power across each of the five, ten and 15 years according to data from the Investment Management Association.

"Confidence in not only the Dollar but other currencies is declining, and people are looking for a place to put their money," said Rob McEwen, chairman and CEO of US Gold – and founder of world No.3 gold-miner Goldcorp – speaking this week to Business News Network at the PDAC mining conference in Toronto.

Repeating his forecast of $2000 gold by the end of 2010 – and $5000 an ounce by the bull market's peak – "It's just gonna happen," McEwen laughed.

"You have governments around the world that are printing money. The debt levels are going up...Gold Mining supply adds about 1% per year. The money supply is expanding by greater than 8% per year right now."

Asked about the likelihood of governments worldwide reining in spending and money-creation, "Good luck to them!" McEwen said.

"If interest rates rise, our prospects plummet," writes London Times columnist and economic consultant Anatole Kaletsky today.

"Fighting inflation used to be the touchstone of economic policy. But this dusty old orthodoxy must go. [UK] interest rates will have to remain low...certainly no higher than 1-2%...not just for the rest of this year, but until 2014 or 2015."

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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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