Gold News

Gold "Stable...Downside Unlikely" as UK Gilt Auction Fails, Money Inflation Sparks Geo-Political Row

Gold Prices drifted again early Wednesday in London, bouncing from $918 an ounce for the second day running as world stock markets turned higher on a strong Wall Street start.

Like the German Dax and UK FTSE100, however, the S&P index stood nearly one-eighth below its start of the year.

Gold Prices for German, UK and US investors held 5% higher from New Year's Day, but the US Dollar strengthened once more, knocking one-third off the Euro's sharp rally of Wednesday last week.

Government bond prices slipped. Crude oil fell more than 2% to $52.70 per barrel.

"Serious downside risk is unlikely in gold," writes Lawrence Williams today for MineWeb, "bar an end to the world's financial ills.

"So gold remains probably the best wealth protector out there. Gold ETF holdings and physical metal coin and bar purchases suggest an underlying strength in the market."

Looking further ahead, "Gold Prices are expected to surpass last year's record," claims the New York-based CPM Group, launching its annual Gold Investment report.

"Continued volatile and weak financial and economic conditions are expected to be supportive of strong investment demand this year."

New data today showed Japanese exports collapsing by one-half in Feb. from the same month last year.

The Bank of Japan hinted that Yen interest rates may go back to zero from their current 0.1%.

Bank governor Masaaki Shirakawa also refused to rule out using quantitative easing (a.k.a. Printing Money) to devalue the Yen and side-step a return of domestic price deflation.

New data in the US meantime showed new mortgage approvals jumping by one third last week, after the Federal Reserve promised to buy $750 billion of home-loan investments, squashing interest rates to all-time record lows.

The rates charged on 30-year loans remain high, however, compared with government bonds. Data from Bankrate.com shows the gap above 10-year US Treasury bond yields reaching 2.4% – nearly one whole percentage point above the last decade's average.

Auto loans in the US now cost 7.7% more than one-month interbank loans, says Bloomberg, more than four times the average gap since 1999.

"We don't want a situation in which some countries are making extraordinary efforts and other countries aren't," said Barack Obama – now 65 days into the job of president – in a speech reported worldwide today.

He also claimed that the Strong US Dollar – up by more than one-fifth from its record low of last summer – reflects global faith in America's strong economy.

But Obama's budgetary and bank rescue plans "will undermine the stability of the global financial markets," charged Czech prime minister Mirek Topolanek – current president of the 27-nation European Union – in Brussels this morning.

"All of these steps, these combinations and permanency, are the way to hell. We need to read the history books."

"The biggest success of the European Union is the refusal to go this way."

Yesterday Topolanek's government was hit by a vote of no confidence at home in Prague.

"Gold has fallen in the past few days because equities really shot up," said Tetsuya Yoshii, head of derivative products at Mizuho Corporate Bank in Japan, to Bloomberg News this morning.

"But with all the money being pumped into the system everywhere in the world, inflation is going to be a problem in the future – and that will keep gold stable in its current $850 to $950 range."

Today the US Congress will begin debating the latest government budget proposed by Barack Obama – now 65 days into the job of president.

His estimates put the 2010 fiscal deficit at $1.17 trillion, but the independent Congressional Budget Office (CBO) says it's really one-fifth larger.

By 2019, the CBO warns, Obama's proposals would take Washington's outstanding debt to $9.4 trillion – some 82% of the US economy and the worst level since the post-war recovery of five decades ago.

Late on Tuesday, the Federal Reserve confirmed that its $300 billion program of "Quantitative Easing" will include buying long-dated, 30-year US Treasury bonds with newly created money.

Here in London – where the Bank of England is already buying public debt with freshly created cash – an auction of 40-year government gilts today failed to find its full quota free-market bidders, selling only 93% of the total £1.75 billion offered.

"Basically it's the first failed auction in 14 years," says John Wraith, Sterling strategy chief at RBC Capital Markets in London, speaking to Bloomberg.

"They didn't receive enough to cover it all, so the [gilts] market has obviously sold off extremely heavily."

For UK investors now Ready to Buy  Gold, meantime, the price rose to recover one-third of Tuesday's £35 drop, trading at £625 an ounce as the Pound fell hard on the currency markets.

"Monetary policy should bear the brunt of dealing with the ups and downs of the economy," said Bank of England chief Mervyn King yesterday, challenging the Keynesian consensus amongst politicians in what the British press calls a "stunning attack" on the government.

"Given how big those [government] deficits are," King went on – just before prime minister Gordon Brown left for the United States to promote deficit-spending ahead of next month's G20 summit – "it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits."

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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