Gold Hits 5th Record High in 6 Days; "Flight to Commodities" Driven by Ultra-Low Interest Rates
The Gold Price jumped yet again on Tuesday morning, hitting its fifth record high in six days at the London Gold Fix.
World stock markets held flat while the US Dollar slipped on the currency market and US Treasury bonds rose together with German Bunds on news of weaker-than-expected economic sentiment in Europe.
Crude oil rose above $74 per barrel, a 7-week high.
"Price action [in Gold] bodes well for continued upward movement as the week progresses," says market-maker Scotia Mocatta in its technical analysis.
"The negatives to bear in mind are the massive open long positions," warns a London dealer.
Encouraged by institutional borrowing rates below half-a-per-cent per year, the total number of open contracts in US Comex Gold Futures has risen 3.7% in the last week, adding to the record bullish position already held by hedge funds and other speculative traders.
"Chinese investors are [also] placing leveraged bets," says Wei Gu, a blogger for Reuters in Beijing.
"Leverage is not allowed in China's stock market, so people eager to maximize their returns have flocked to gold trading."
The People's Bank of China recently vowed to continue with what it called an "appropriately loose monetary policy," holding interest rates at record lows.
Xinye Bank, which trades through the Shanghai Gold Exchange, grew its client gold dealing three times over during the first half of '09, trading $3bn worth of contracts.
"Customers are allowed to borrow as much as 90% of the value of the gold contracts they buy," says Wei.
Noting that several large hedge funds and other speculative players are now seeking to buy physical commodities outright – and thus avoid the "position limits" imposed by US regulators on energy and raw material derivatives – "The Gold Price is available to show policymakers whether their monetary policy is appropriate," writes Martin Hutchinson at Prudent Bear.
"If, following last week's breakthrough, the Gold Price continues to increase, heading for $2,400 per ounce – the equivalent in today's money of the 1980 high – that will be an excellent signal that monetary policy urgently needs tightening.
"And if, after a first monetary tightening, Gold retreats for a few weeks and then breaks through its recent highs, that development will be a signal that monetary policy must be tightened further, as the flight to commodities has not halted."
Here in London late Monday, the UK prime minister challenged comments made by the Conservative opposition leader David Cameron that Quantitative Easing "will have to stop, because in the end printing money leads to inflation."
"That would imperil the recovery," said Gordon Brown to an audience at Bloomberg News' offices in the City.
The British Pound sank to fresh multi-month lows on the forex market today, pushing the Gold Price in Sterling to a new 7-month high of £677 an ounce, just 3.5% off its all-time peak of Feb. '09.
Eurozone investors looking to Buy Gold saw the price move up to €721 an ounce on Tuesday.
The Gold Price in Euros peaked in Feb. at €799 an ounce.
"My concern is that this market is becoming increasingly uni-dimensional," said Paul Walker, chief executive of the widely-respected GFMS consultancy at a seminar in Tokyo today.
"Jewelry demand has become eroded. The question we must ask is, is there a compelling, sustainable case for investment in gold in the short to medium term?"
"Gold is in a long-term bull market with good potential for absolute investment returns," says John Hathaway, manager of New York's $1bn Tocqueville Asset Management gold fund.
Currently visiting Dubai to promote a Sharia-compliant Gold Investment product, "I see gold continuing to rise against paper currencies," Hathaway is quoted by the TradeArabia News Service.
"There is a supply-demand imbalance in the market, with stagnant mine supply at a time of greater investor interest."
Hathaway says gold could rocket to $5,000 or even $10,000 an ounce – putting it equal to one unit of the US Dow Jones Industrial Average, a level reached in 1933 and again in 1982 – before the current bull market in bullion and the long-term bear market in equities are complete.
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