Gold Slips Again, Stocks Tumble, Even as Interest Rates Fall to New Historic Low, Government Debt Signals Massive Inflation
Gold held in a tight $5 range early in London on Thursday, recording an AM Gold Fix fully 2.5% below yesterday morning at $842.50 per ounce.
Global stock markets also added to Wednesday's sharp losses, despite a record-low cut to interest rates from the Bank of England – the world's fourth-largest central bank.
The Tokyo Nikkei fell nearly 4%. London blue chips were dragged back to their 2008 close.
Crude oil bounced to $43 per barrel after yesterday's historic 12% plunge.
Government bonds were bid higher across the board, pushing 10-year US Treasury yields back below 2.50%.
"The world economy appears to be undergoing an unusually sharp and synchronised downturn," said the Bank of England today as it slashed UK rates by 0.5% to a new record low in its 300-year history of just 1.50%.
The Old Lady "noted that the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed.
But "looking through the volatility," she went on, "there remained a significant risk of undershooting the 2% Consumer Price inflation target."
Central-bank speak for the horrors of deflation, "undershooting the inflation target" opens the door to Quantitative Easing being applied in the UK as in Japan and the States, with the Bank of England and UK Treasury actively buying mortgage-backed bonds and other failed securities in a bid to boost prices, credit and spending.
(See Quantitative Easing Explained here...)
Sprinting towards the zero-rate finish already reached by the US and Japan, however, the British Pound Sterling actually rose on today's cut, bouncing 6% from last week's 7-year low to the Dollar and reaching $1.5250.
Versus the Euro, Sterling jumped to €1.12, while the Gold Price in Sterling continued its slide, dropping to a 10% discount from Monday's all-time record high of £611 an ounce.
"After steadily accumulating fund-buying support in late Asian trading and in London, precious metals encountered headwinds during the New York session," writes Manqoba Madinane for Standard Bank in Jo'burg today, falling "in line with a steep decline in WTI crude oil prices.
"We also note that Eurozone inflation statistics could raise investors' expectations of an aggressive ECB rate cut [next Thursday] – which would propel the greenback on the upside and weigh heavily on precious metals in the near term."
Madinane now pegs "primary support" at $832 an ounce, with overhead resistance to the Gold Price sitting at $863.
Meantime on the government bond market – the only other market besides Gold Investment to rise during 2008 – "Obama says recession will worsen without bold action," claims Reuters ahead of today's policy speech from the US president-elect.
Early rushes say Obama will launch a stimulus package costing $775 billion. That's over and above the budget deficit for 2009 – already pegged at a record $1.2 trillion.
Washington's spending deficit will "be about 8.3% of gross domestic product," says Reuters, "shattering the previous post-World War Two record of 6% hit in 1983."
Joining the chorus of analysts spying a flight to Gold in 2009, "We believe gold will attract safe-haven buying from risk-averse investors this year," says James Steel – precious metals analyst at HSBC, Europe's biggest bank – in a research note.
"Economic uncertainties are likely to persist for the foreseeable future."
Bang-on-the-money precious metals forecaster Paul Walker of London's GFMS consultancy agrees, pegging the peak for Gold in 2009 at $1,100 and above.
"Gold is looking a very attractive proposition for those people looking for a safe place to put their cash," Walker tells South Africa's MiningMX.com.
"You have to look at the huge fiscal stimulus packages already put in place by the United States authorities, and with more being promised once president-elect Obama gets into office.
"There is no free lunch here. When it comes to repayment of the debts, government will have the choice of raising taxes or allowing inflation to run...and it is much easier to take the pain of rising inflation." (Read more on the Looming 2009 Bond Drives here...)
Over in the world's No.1 gold market of India, however, high Gold Prices and the worsening economy – plus a lull in the Hindu festival calendar – continued to suppress fresh gold demand on Thursday.
"There are no phones ringing...Not even enquiries from clients," said one bank dealer in Mumbai to the Reuters newswire earlier this week.
Even so – and contrary to reports from the Bombay Bullion Association – India's gold imports for 2008 are set to show only a "slight" fall from the record 726 tonnes imported during 2007 according to trade-body the World Gold Council.
"The last two quarters of the year have been better than the comparative period during the previous year," claims Ajay Mitra, managing director for the WGC in India.
Looking ahead to Gold in 2009, this month's harvest festival of Makar Sakranthi should see "some activity on the demand front," said one local trader to the newswires today, "or perhaps if prices correct substantially from here."
The Gold Price for India buyers has risen in 26 of the last 38 years, averaging almost 17% annual gains overall.