Gold News

Gold Supported by Ultra-Low, "No Surprise" US Fed Interest Rates; Silver to Gain on New End-Uses

Gold reversed an earlier 0.6% gain as New York opened for business on Wednesday, trading back in its overnight range around $1239 as broad commodity markets ticked lower and Asian stocks closed the day lower.

G7 government bonds rose. Crude oil slipped towards $77 per barrel.

The US Federal Reserve will announce its latest interest-rate policy – unchanged in 18 months – at 14:15 ET today.

"There should be few surprises," says Walter de Wet at Standard Bank.

Noting the 65% chance of rates staying below 0.25% until May 2011 that's currently signaled by US futures, "We believe [interest rates] will be flat for longer...guided by the Taylor Rule," he says.

"[It] still indicates the Fed funds rate should be negative, because inflation is low and unemployment so high.

"For this reason, we still see support for gold despite the metal touching all-time highs almost every month. We still favor buying dips."

UK investors wanting to buy gold today saw the price dip to a 1-week low of £831 an ounce, as the Pound reached a new 6-week high on news of the first dissent over Bank of England interest rates since Aug. 2008.

UK retail-price inflation is running at a 19-year high above 5%. Base rate has now been held at 0.50% since March 2009.

When the executive met a fortnight ago, one BoE member – economist Andrew Sentance – voted for a 0.25% hike.

Gold priced in Euros meantime unwound the last of Monday's 1.5% drop, trading back above €32,600 per kilo.

"July 1 could be the day liquidity dies," says FT Alpha, quoting Barclays' analyst Joseph Abate, who notes that next Thursday will see €442 billion ($542bn) pulled out of the Eurozone money markets when the first – and largest – of the European Central Bank's long-term refinancing operation (LTRO) expires.

Abate forecasts a jump of perhaps 0.75% in short-term interbank lending rates.

The global financial crisis is generally agreed to have begun with a jump in interbank interest rates on 9 Aug. 2007.

"We [also] believe silver is also well placed for a move higher on the back of gold," says Standard Bank's de Wet, a view expanded by the VM Group's new 2010 Silver Book for Fortis Bank Nederland.

"Silver Price support has increasingly come to depend on investment demand more than industrial demand," the report says, pointing to "explosive growth in supply.

"However, new and emerging end uses for silver could well pick up the baton from photography...Solar, medical, textile, radio frequency identification, water purification, and food hygiene, among others, will more than offset the decline in photographic consumption and lead to the silver market surplus eroding significantly by 2020."

Silver Prices today peeped above $19 an ounce for only the fifth time since March 2008.

The volume of Silver Bars held for exchange-traded trust funds – which enable investors to track the price without owning metal – rose 0.1% last week, according to VM Group data.

Gold ETFs worldwide, however, added 0.3% to their hoards on Tuesday alone, reports Bloomberg, taking the total held in trust to 2,050 tonnes.

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Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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