Gold News

Gold Slips But "Inflation Foundations Laid" as US and UK Authorities Side-Step the Banks, Start Lending Directly

Gold Prices fell sharply into the New York opening on Monday, dropping 1.8% to a four-session low of $895 an ounce as the US Dollar also slipped on the currency market.

World stock markets ticked down despite a fresh wave of central-bank and government aid, but crude oil crept back above $40 a barrel.

Bond prices held flat, with the 10-year US Treasury offering 3.03% in yield.

"Commodity sentiment benefited precious metals [last week] but gold didn't enjoy any of these fund flows," notes Manqoba Madinane for Standard Bank in Johannesburg.

Looking to a key measure of investor stress, "The 5-year CDX investment-grade credit spread narrowed on Friday," Madinane adds, "signaling less financial market systemic risk.

"Coupled with rumors of more US government support following the [weak] employment report, this lifted US equity markets, further compromising fund flows into Gold Investment."

Latest figures from the SPDR Gold ETF traded in New York show it swelling by nearly 3% last week, adding 24 tonnes to the stock-pile of gold it holds in trust by Friday's close.

The US Gold Futures and options market, however, saw its rapid revival grind to a halt after swelling by 25% inside one month.

All told, hedge funds and other large speculators grew their "net long" position (of bullish bets minus bullish bets) by more than one tenth in the week-ending Tues 3 Feb.

The so-called "smart money" in contrast – meaning those commercial traders working for refineries, mints, Gold Mining firms and bullion banks – reduced their bullish ratio (measuring bullish bets as a proportion of all their contracts) to a 6-month low of 30%.

Today in Tokyo – where Japanese machine tool orders for January were reported 84% below last Jan.'s level – Gold Futures traded at the Tocom slipped 1.2% against the Yen, falling to ¥2,656 per gram after touching new 16-week highs at the start of business.

The Gold Price in British Pounds meantime slid to a 3-week low, falling below £600 an ounce as the UK currency rose once again on the forex market.

Versus the European single currency, the Pound rose to its best level so far this year – up almost 10% from January's all-time record low to the Euro.

"The core problem for investors is financial instability," reckons Ashok Shah, chief investment officer at UK asset managers London & Capital.

"If you look at the IMF numbers [forecasting a total $2.2 trillion loss on US bad debts], we are only halfway through the non-performing loan cycle," he told Reuters this morning.

"Governments are supplying liquidity into the system and unless they sterilize it [by issuing bonds to soak up the excess money creation] they are laying the foundations for much higher inflation for years to come.

"These are the things gold thrives on."

Today's French press reports that President Sarkozy will lend €6 billion ($7.7bn) in emergency funds to ailing auto-makers Renault and Peugeot Citroen.

Late on Friday the US Federal Reserve announced a new $200 billion lending program aimed at hedge funds and other large investors, side-stepping their traditional commercial bank lenders and hoping to encourage them back into buying "asset-backed securities" such as auto- and credit card loans.

This coming Friday the Bank of England will launch its own £50 billion lending scheme ($75bn), offering to buy so-called "corporate paper" directly from UK corporations and thus side-stepping the commercial banks.

Despite the official inter-bank lending rate here in London falling almost in half over the last 3 months, says today's Financial Times, only one in five companies has seen its cost of borrowing drop.

Over on the supply-side of the Gold Market, meanwhile, "Money can be made available," says Patrick Meier, MD of RBC Capital Markets, speaking at the African Mining Congress in Livingstone, Zambia, after what he called "a flurry" of equity financing in the junior sector.

"These fund raisings were predominantly in gold [because] it's the commodity currently in the limelight," he added, also noting the larger fundings achieved by major producers Newmont Mining and Kinross.

This morning world No.4 Gold Mining group Anglogold Ashanti reported full-year production for 2008 of 4.98 million ounces, in line with previous forecasts.

London-listed competitor Randgold meantime reported a 3.6% drop in its year-on-year output. Revenue jumped by almost one-fifth, but costs also surged, forcing a 1.1% decline in net profits for 2008 as a whole.

Anglo meantime slashed its "Gold Hedge Book" – one of the largest forward positions owed by the major gold miners – by one-half, the results showed. Itnow expects to produce between 4.9 and 5.0 million ounces this year at cash-costs per ounce comparable to the 2008 figure of $444 an ounce.

That was almost 25% higher from 2007.

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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