Gold News

Gold Rally Stalls as "Targeted" & "Courageous" Governments Spark Huge Monetary Inflation

The Spot Gold Price rose 2% early Monday, briefly touching $739 an ounce before slipping back as world stock markets continued to struggle after suffering their worst month in 21 years.

Crude oil slipped again, while the US Dollar and Japanese Yen held steady on the currency markets after October's record surge, when "all the trades that worked well for the past five years went badly very quickly," as one Citigroup strategist put it to Reuters this morning.

Government bonds rose – pushing yields lower – on hopes of further interest-rate cuts to follow the United States, China, Norway, Australia, South Korea, Japan, India and Vietnam.

"It seems that central banks are in a race to drive their rates down towards zero," says Steven Barrow at Standard Bank in London.

"The Bank of Japan only has another 30 basis-points to go, the Fed 100 bps...The key question this week is whether the European Central Bank and Bank of England take the baton from the Fed and cut 50 bps [on Thursday]."

Monday morning saw the Pound Sterling fail to hold an early 3¢ rally, while the European single currency traded more than 3% below Friday's one-week peak.

The Gold Price in Sterling rose 1.4% from last week's close to touch £457 an ounce.

For French, German and Italian investors looking to Buy Gold today, the price gave back an early 1.2% bounce to trade below €570.

"All the Western central banks have guaranteed the banking system," said Mario Innecco of M.F.Global brokers in London to Bloomberg today.

"The cost is going to be higher inflation and paper currencies will be worth less," he believes, with the Gold Price rising to $950 an ounce by year-end.

But while Gold Bullion cannot be created at will, making it a potentially useful "inflation hedge" as the world's money supply jumps, "investors are viewing it as part of the commodity class," says Joel Crane, a strategist in New York for Deutsche Bank.

"Commodity is a bad word right now. Through this whole credit crisis mess, cash has been king."

Hedge funds and other institutions cut their betting on the Gold Price yet again in the week-ending last Tuesday, new data from US regulator the CFTC showed at the weekend.

So-called "large speculators" have now slashed their bullish bets on Gold Futures and options by 57% since mid-July. Private individuals playing the leveraged gold markets have cut their long positions by one-half.

Overall, the number of outstanding derivatives contracts on the US Comex exchange has fallen by more than one-third so far this year.

"Relatively seen [in the commodity complex], the metal is in a better position than its peers, says Wolfgang Wrzesniok-Rossbach at German refining group Heraeus.

"Private investors looking to buy more metal were not too unhappy about the recent price drop. Demand for physical bars has remained very robust in the past week."

US crude oil prices today slipped back below $68 per barrel, down more than 45% from the all-time high of this summer.

Soft commodities ticked higher, but base metals traded in London also fell sharply after last week's record volatility.

House prices and retail sales fell sharply in Australia during the third quarter, new data showed today. Here in Europe, "the outlook remains bleak further ahead," said the European Union's executive arm this morning, "with several of the EU economies in or close to a recession."

The European Commission has slashed its 2009 growth forecast for the world's largest single economic region from 1.2% to just 0.1% annualized.

"We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector," claims Joaquin Almunia, European commissioner for economic & monetary affairs.

Last week Angela Merkel, the German chancellor, claimed that the global credit crisis demands "targeted" and "courageous" action from government. Yesterday she urged Germany's private banks to start using the government's €500 billion emergency fund ($637bn) she's offered – an offer finally accepted today by Commerzbank – and also promised a fiscal stimulus package worth €30bn.

"In addition, nearly one million jobs will be guaranteed or created," she told Bild am Sonntag in an interview.

Today the South Korean government in Seoul announced an extra $11 billion in new spending and tax cuts.

Ahead of Tuesday's US presidential election, latest data from the Federal Reserve point to an unprecedented jump in the supply of notes and coins in circulation – up by 25% last month from a year earlier.

Private-bank debt owed to the Federal Reserve has also leapt as the central bank fights to counter the risk of depression with Hyper Inflation of the Money Supply.

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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