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Gold Jumps to $1095, Risk of "Hot Money Currency Crisis" as Fed, ECB and BoE Vote on Interest Rates

The price of Gold rose sharply for the third session running early in London on Wednesday, gaining 1.2% against the US Dollar to hit fresh record highs above $1095 an ounce.

Crude oil bounced back above $80 per barrel. World stock markets added almost 1.0% on average.

The US Dollar rose against the Japanese Yen, but slipped against the Euro, Sterling and commodity currencies of Australia and Canada.

"An investor can protect themselves versus potential devaluation of their currency by choosing to hold Gold instead," says the latest Weekly Commodities from Natixis, the French investment bank running €433 billion ($639bn) in assets under management.

"Rumors of the Dollar's imminent demise are likely to prove premature...[But] to a significant degree, gold is already behaving as though it is an international currency."

Noting demand destruction amongst jewelry and industrial buyers, however – plus the surge in scrap-metal supplies and a 6% rise in global mining output during the first half of 2009 – Natixis warns that "Should hot money [investment] move into reverse and leave Gold, this could precipitate a currency crisis similar to those seen in emerging markets in 1998-8 or NZD:JPY in 2008."

The Asian currency crisis of the late 1990s saw the Thai Baht and South Korea Won drop half their value to the US Dollar. Last year's "hot money" panic out of the New Zealand Dollar drove it 51% lower against the Japanese Yen.

"Obviously, [we got] a good price relative to the original assumptions," said an official of the International Monetary Fund at a teleconference today, speaking about India's purchase of 200 tonnes of IMF gold announced yesterday.

"Of course, this is only half the [403-tonne] sale that we have completed, so we don't want to get ahead of ourselves. We still have another half to go. I hope we'll still be lucky."

Since the Reserve Bank of India began its IMF purchases in mid-October, the Gold Price has risen almost 4% against the US Dollar and more than 6% against the Indian Rupee.

Since the IMF confirmed that it would sell one-eighth of its gold holding to help "stabilize" its finances, the Gold Price has gained more than 28%.

"Look for support now back near former resistance levels," says the latest note from Scotia Mocatta's technical analysis team in New York.

Pointing to today's US monetary policy decision, "We believe the Fed will signal continued accommodative policy well into 2010," says Walter de Wet at Standard Bank in London, "which would not only calm current market fears but also support commodities.

"Being long ahead of the Fed meeting might be preferred. Buy dips [in Gold]."

Yesterday the Reserve Bank of Australia raised its key interest by 0.25%, just half the rise expected by analysts. De Wet's colleague at Standard Bank, chief currency strategist Steven Barrow says that "We see the European Central Bank being pretty dovish [on Thursday] – or at least, neutral relative to expectations. We expect the same from the Fed.

"The Bank of England is the wild card and hence the one that could have the biggest bearing not just on local markets but on global markets as well."

The UK central bank, currently holding interest rates at 0.5% and near the end of its £175 billion ($289bn) quantitative easing program speaks at midday GMT tomorrow.

Gold typically rises when interest rates, relative to inflation, are low. And since 2001, real UK interest rates adjusted for the cost of living have averaged less than 0%.

The Gold Price in Sterling has more than tripled over that time. Early Wednesday it touched its best level in three weeks, trading above £662 an ounce.

Ten-year UK government gilt yields ticked up to 5-week highs above 3.78%. US Treasury yields held flat, with the 10-year bond offering 3.49%, and German Bunds offered 3.31% by lunchtime in London.

Eurozone investors now Ready to Buy  Gold saw the price hit its best level since 9th March, trading above €741 an ounce.

Over in India, meantime – formerly the world's No.1 private consumer of gold, but overtaken by China during 2009 to date – the new all-time record high in Gold Prices today capped jewelry demand despite the current wedding season, according to local reports.

"Currently I have around 15-20 people lined outside my shop [wanting to sell gold], and we expect around 40-50 more by this evening," said one Zaveri Bazaar scrap dealer to Reuters today.

"I haven't booked any deals since yesterday's late surge," said a bullion dealer. "I have advanced orders in the range of below $1050 an ounce."

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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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