Gold News

Gold Says "Governments Making a Mess", Investors See Higher Prices Ahead as Fiat Money "Loses Esteem"

Gold Prices slipped from early gains in London on Monday, dipping below last week's all-time record close vs. the US Dollar as European stock markets also gave back an early 1% rise.

Asian trading was light, as Hong Kong was closed for a holiday.

Oil drifted down towards $80 per barrel, while the major currencies were little changed, as were government bonds.

The US Treasury will this week issue a record $123 billion of new debt.

"If Gold is telling us anything today," writes Fidelity International analyst Tom Stevenson in London's Daily Telegraph, "it is that governments – principally America's and [the UK] – are about to make a mess of the exit from their economic stimulus programs.

"Either they are going to tighten too soon, plunging the world into a deflationary ice age, or, more likely, they are going to hang back too long until we are swept away by hyperinflation."

Pointing to the Bank of England, "When a central bank gets to own around 30% of the government bond market, it is very hard to suggest that political factors do not play a bigger role in policymaking," writes Steven Barrow, chief currency strategist at Standard Bank in London.

With "virtually no chance" of the current UK government being re-elected next May, Labour "is likely to use the upcoming pre-budget report to keep fiscal policy actively stimulating the economy," he warns. "[But] the opposition Conservatives are threatening to take away the Bank's ability to 'print money'."

The Bank of England has now bought £165 billion (($269bn) of UK government bonds, equal to the entire public deficit for fiscal-year 2009 to date.

"Hence the Bank is caught between a bit of a rock and a hard place," says Barrow. "It could come up smelling of roses, with a stronger Pound into the bargain. But the chances are that it won’t."

The British Pound today recovered half-a-cent from Friday's sharp sell off, pushing the Gold Price in Sterling back 0.7% to £645 an ounce.

A survey of 1,700 British investors undertaken last week by Barclays Stockbrokers – the UK's largest execution-only retail brokerage – shows 40% believe the Gold Price will rise from here.

Thirty per cent of respondents say gold will fall. One-fifth of Barclays clients think the price will hold steady, and 10% answered "Don't know".

Over in the leveraged derivatives market, meantime, latest data from US regulator the Commodity Futures Trading Commission showed speculators trimming their record bet on gold in the week to last Tuesday.

Cutting their "net long" position by 0.8%, hedge funds and other non-commercial players still held a futures and options position equal to 866 tonnes of metal.

Including commercial industry trades and retail investors, the correlation of Gold Prices to the total number of US Comex contracts rose to its highest level on record, giving what statisticians call an "r-squared" of 99%.

"There are important internal dynamics – such as weak Indian imports and even weaker central bank sales," says the latest BNP Paribas Fortis Metals Monthly from Virtual Metals in London. "But all the action right now is investor-led and based on larger financial flows.

"If the US Dollar regains esteem, Gold could get savaged – but perhaps not yet."

During this decade's bull market so far, notes Virtual Metals, the most significant peaks were followed by a drop of 16%, 12%, 9%, 23% and 30% respectively.

"The time span for this to happen hitherto has been 44, 25, 44, 104, and 157 trading days after the peak," the consultancy adds, "giving us a time somewhere between mid-December 2009 and May 2010" if last week's new record Gold Prices aren't beaten soon.

"[Gold's] constancy over the centuries, through a huge range of economic and political circumstances, through calm and crisis, peace and war, and through immense changes in the gold industry itself, is remarkable," writes Jill Leyland, former chief economist for the World Gold Council – and editor of a new edition of Roy Jastram's 1977 book, The Golden Constant – in the latest Alchemist magazine for members of the London Bullion Market Association.

"Gold's appeal, apart from its relatively limited industrial use, lies in two elements," says Leyland – "the human need for security and the desire to own something of beauty...needs that do not change over time."

Since gold was officially de-monetized in the 1970s, however, "Investors [also] turn to gold when confidence in fiat money, and particularly in the US Dollar as the world's leading fiat money, falls," she adds.

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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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