Gold News

Gold Recovers from 2% Drop as Fed Dissent Breaks Out Over "Moral Hazard"

From Chris Mullen at

Gold fell hard on Thursday, losing nearly 2% to $864.60 by the New York open.

But the Gold Market then rallied back higher into the close and ended with a loss of just 0.87%.

Silver also dropped over 2%, before surging to find a gain of 1.5% by the close.

The Gold Price in Euros closed around €561 after bottoming at €559 per ounce. Platinum gained $7 to $1998.50, and copper remained at about $3.55.

Gold and silver equities rose over 1% about a half hour into trade before they fell back to see a slight loss by late morning, but they then rallied back higher for most of the rest of trade and ended with roughly 3% gains.

The US Dollar index initially rose after the European Central Bank and Bank of England left interest rates unchanged at 4.0% and 5.0% as most expected. But it then fell rather markedly after ECB President Trichet commented that the ECB is quite worried about inflation and has seriously considered a rate hike.

While no hike materialized at this meeting, a hike at the ECB's next meeting looks increasingly possible, while the Fed continues to keep its rate unchanged.

"Forget the US Fed raising rates," says Jim Sinclair of, "because if they did the next move would be a 1% cut due to the ramifications of that act on structured investment vehicles and default derivatives.

"Gold is a currency. Right here, fundamental industry demand takes a far back seat to the direction of the Euro and the US Dollar index" in determining its direction.

Thursday's eventual weakness in the Dollar also sent oil back higher as the recent drop in demand was seen to be factored in after the drop in prices from the record $135.09 a barrel during the past two weeks.

Oil surged in late US trade and ended with more than $5 gains, the largest one-day price gain ever, as market participants covered shorts and looked towards persistent supply concerns.

Demand growth may also rebound due to warmer temperatures arriving in the US, forcing consumers to turn on the A/C.

Treasuries fell as the Dow, Nasdaq, and S&P rose on better than expected retail sales reports and a larger than expected drop in jobless claims.

Meantime at the Federal Reserve, dissent broke out regarding the US central bank's role in selling Bear Stearns to J.P.Morgan. Fed vice-chairman Donald Kohn said in Congressional testimony that "had Bear Stearns been allowed to walk into bankruptcy court, that would have disrupted the financial system and had very serious effects on the economy."

But Richmond Fed chief Jeffrey Lacker said in a separate speech that the safety net for bailing out Bear Stearns will not necessarily be made available to other banks as well.

Without naming names, Lacker said the Fed had been approached by some banks looking to take out other banks with its help – and the Fed had denied them.

"It is uncomfortable," said Lacker in a London presentation, "because the scope of lending support is viewed by market participants as having been expanded, and we've not yet aligned our supervisory activities accordingly."

Philadelphia Fed governor Charles Plosser said separately at NYU that "Policy interventions in financial markets run the risks of increasing moral hazard and inhibiting efficient price discovery.

"Moreover, interventions intended to quell instability can, by creating moral hazard, actually make instability more severe in the long run."

On the data front today, 13:30 GMT brings May's jobs data, with non-farm payrolls expected down 60,000 and the Unemployment Rate up at 5.1%.

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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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