Gold News

Gold "Remains Soft" But Record US Bond Sales & Fed's Money Creation Could Force "Big Jump"

Gold bounced from new August lows Wednesday lunchtime in London, trading at $945 an ounce as the US Dollar pulled back from new two-week highs on the currency market.

Crude was little changed below $70 per barrel, while Asian stocks caught up with yesterday's sell-off in New York. European shares gave back an early 1% bounce as government bonds pushed higher again.

The yield offered by 10-year German Bunds fell to 3.45%.

"The market tone for Gold remains soft," says a technical analysis from Scotia Mocatta, the London Bullion bank, "and only a move above yesterday's intraday high [at $950 an ounce] would reverse the psychology of the price action.

"Still, [gold] resists the urge to collapse through the 50-day average, coming in at $941...Marginally past that point lies one-month uptrend support at $938.63."

Over in India – where the post-harvest festival season typically sees strong gold demand leading to Diwali in late Oct. – the dip in Rupee Gold Prices continues to spur re-stocking by wholesalers and jewelers, Reuters reports.

"I did around 250 kg yesterday evening," says one bank dealer in Mumbai, "and still there is demand."

"I have a lot of orders in the range of $930-935 an ounce," another tells the newswire.

Looking ahead to Wednesday's US policy announcement from the Federal Reserve, however, "The markets are a bit lacklustre now and traders are probably focused on the key interest rate decision later tonight for more direction," reckons Adrian Koh at Phillip Futures in Singapore.

"Gold is very much trading within a band of $920-$980."

On the data front today, the UK reported a 14-year high in unemployment, with 573,000 people – some 2% of the working population – losing their jobs since New Year.

The level of GDP has dropped some 6% from its peak, adds the Bank of England in today's Quarterly Inflation Report. Manufacturing output has dropped over 10% from a year ago.

"Given the depth of the recession," the Bank says, "to erode the margin of spare capacity that has been created will require an extended period of robust growth. [But] recovery could be slow and protracted."

Last week, the Bank of England surprised market analysts and traders by extending its Quantitative Easing program by 40% to £175 billion ($287bn), buying government gilts and corporate bonds in the open market in a bid to give banks and other lenders more cash and credit.

In response, however – and despite the base interest rate now standing at an historic low of 0.5% – lenders are making a record profit on new loans, says Michael Saunders at Citigroup, earning a full 2.0% extra on fixed-rate home loans than they're currently paying savers in interest.

Before the financial crisis broke in August 2007, that profit margin stood at just 0.1%, reports The Daily Telegraph. Over the last six months, meanwhile, the Bank of England "has monetized 60% of public spending" via its Quantitative Easing – a.k.a. money printing – notes Martin Hutchinson at Prudent Bear.

"That's a higher level than the 50% monetization of public spending undertaken by the Weimar Republic in 1919-23 and the result will be the same" – hyperinflation as confidence in the currency collapses.

Of the US government's deficit, "It is astonishing," says Keynesian economist Brad De Long. "Between last summer and the end of this year the US Treasury will expand its marketable debt liabilities by $2.5 trillion."

That's equal to more than one-fifth of all US equities, notes the Berkeley professor, and equal to 8% of all traded Dollar-denominated securities.

"And yet the market has swallowed it all without a burp," he says, citing Tuesday's successful auction of 3-year US Treasury debt, which drew bids for 2.89 times as much debt as was on offer.

With many foreign buyers, particularly the Chinese, "shifting to the shorter end of the curve from the longer end," counters Peter Bookvar at the Big Picture, "the tough part though comes [today] when the 10-year benchmark note auction takes place, with the 30-year following on Thursday."

A poor result could hurt the Dollar and send US Gold Prices higher, notes Walter de Wet at Standard Bank. "Over the past few days, a slide in Treasuries has resulted in Dollar weakness," he says, adding that the Federal Reserve is "unlikely to raise interest rates" at today's meeting today, "but might shed some light on its own Quantitative Easing.

Already $250 billion through its planned $300bn purchase of bonds with newly-created money, the Fed's QE program may "nearly [have] come to an end," says de Wet. But a surprise extension – such as the Bank of England announced last week – could give Gold and silver "strong support.

"When the BoE announced resuming its QE programme last week, gold jumped almost $10. If the Fed follows suit, we expect a bigger jump in the Gold Price."

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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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