Gold News

Gold Jumps as "Speculative Excess" Removed; Gold Investment "Justified" by Money Supply & Velocity

Gold rose further from yesterday's 2.3% jump to reach 8-session highs on Tuesday, as world stock markets also pushed higher and the US Dollar dipped from a 6-month high on the currency market.

Wholesale gold dealers noted "strong physical demand" in Asia, with "weak shorts" adding to the buying pressure, forced to close their bearish positions at rising Gold Prices.

"As the money supply increases, the Gold Price rises," says new analysis from global gold-marketing group the World Gold Council. "This effect has a lag of about 6 months."

The WGC's latest research also finds that Gold Prices offer a good indicator for the future velocity of money – the rate at which money changes hands as it is spent – particularly in the United States.

Gold investors "are [therefore] justified in their concern that Quantitative Easing policies...will eventually lead to an increase in the velocity of money and of inflation," concludes the WGC's analyst, Juan Carlos Artigas.

Australia's central bank today surprised the currency market by keeping its overnight interest rate on hold at 3.75% after three consecutive hikes.

Germany reported weaker-than-expected retail sales growth for Dec., but Swiss consumer sentiment, UK construction activity, and deflation in European factory-gate prices were all "less bad" than forecast.

US Treasury secretary Tim Geithner will today present the White House's record 2011 budget – one-third financed by a new record deficit – to the Senate Finance Committee.

"Gold and silver investment demand has waned since the end of 2009," notes BNP Paribas analyst Anne-Laure Tremblay, adding that "Most Gold ETFs saw net outflows in January."

"As the flux of investors liquidating their positions diminishes, gold ought to eventually push higher," says a note from MKS Finance, a division of the Swiss refining group.

Over the two weeks ending Tues 26 Jan., notes London's VM Group, the "net long" position held by speculative players in US Gold Futures has shown "the largest two-week decline since the height of the financial crisis in October 2008."

Silver investment positions in New York futures also "fell heavily" last week, says VM in its latest Precious Metals Investment Weekly for Fortis Nederland Bank, showing "the largest weekly decline since August 2008."

Gold Investment positions in New York derivatives reached all-time record levels late last year, peaking with what analysts called "speculative excess" above 1020 tonnes-equivalent in Gold Futures and options.

"The next major [price] resistance is seen at $1120," says a technical note from market makers Scotia Mocatta.

"Silver should be challenged by December's dual lows at $16.75," says another dealer.

"One indication of gold's underlying strength is its recent good performance in non-US Dollar currencies," adds James Steel at HSBC, the London-based bank.

The Gold Price in British Pounds today broke above £700 an ounce for the first time in 15 sessions.

Eurozone investors looking to Buy Gold saw the price rise within 5¢ of €800 on Tuesday morning – just 1.6% below Dec.'s all-time high.

"The Eurozone is riddled with structural problems," says Standard Bank's forex strategist Steven Barrow, pointing to "huge budgetary and current account discrepancies that imply a degree of economic hibernation in countries like Spain, Portugal, Italy, Greece and Ireland.

"Even the best solution to this crisis...is still one in which the market continues to attach a significant default premium to Eurozone bond markets."

Gold priced in US Dollars briefly touched $1115 an ounce early in London on Tuesday, rising more than $33 from Monday morning and gaining 3.7% from last week's three-month low.

Since Sept. 2007, when the Euro first crossed through $1.40 to the Dollar – the level it slipped below last week – the Gold Price has risen by some 50% against both currencies.

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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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