Gold News

Gold starts Monday at 16-month high on threat of negative real interest rates

Gold rose throughout the Asian session on Monday, putting the Spot Gold Price above $712 per ounce at the start of London trade, its highest weekly start since May 2006.

This week brings a widely-expected cut in US interest rates by the Federal Reserve tomorrow, plus the latest price-inflation data for consumers in the United States, Britain and Canada.

"Compared with other metals, particularly silver and palladium, gold has outperformed," says the latest monthly research from Virtual Metals, the highly respected London consultancy.

"Now with a sustained period of high oil prices threatening to stoke inflation and the possibility of a cut in the benchmark interest rate in the US, the metal may be poised to climb still further in coming months."

Gold's last two sustained bull-market rallies both came when real interest rates – the official lending rate minus inflation – slipped below zero. Negative returns to cash mean that money-in-the-bank loses purchasing power, making gold yet more attractive as a store of value. (You can read more about real interest rates and gold here...)

"It makes less sense to own bonds, to own a bank account paying interest because you're getting squeezed," says Thomas Winmill, president of the US Midas Fund. "The way to play a negative interest rate environment is to own hard assets."

Both Bloomberg and Reuters today report bullish surveys of professional gold traders and analysts today.

"I would think that probably the large majority of people think it will go through $730, which is a pretty good reason to think it will," says Stephen Briggs, an economist at SocGen's corporate and investment banking division.

"The big players...they Buy Gold because they think everyone else is going to buy it, because they think it's something that will go up. [So] it snowballs on itself."

Japanese gold futures for delivery in Aug. '08 ended the day unchanged in Tokyo, while the Nikkei stock-market index added nearly 2%. Asia's other major stock markets slipped, however.

In London, the FTSE100 gapped down at the open to lose 1.5% within the first 90 minutes of Monday's session. Europe's 300 largest shares dropped the same proportion on average.

Northern Rock, the struggling UK mortgage bank, fell sharply once more as its depositors continued to withdraw money. Estimates say the bank lost £2 billion in panicked withdrawals on Friday and Saturday.

"The Bank of England's reputation is damaged," write Willem Buiter and Anne Sibert, two London-based academic economists in the Financial Times today. "It had to provide credit [to prevent Northern Rock collapsing] after the governor took a strong public stand against bail-outs."

The British Pound fell hard on the currency markets in early trade, dropping another cent versus the Dollar after Friday's three-cent fall to slip below $2.00 for the first time in three weeks.

The Japanese Yen was little changed around ¥115 per Dollar, and the Euro held steady at $1.3860. Those moves put the Sterling Price of Gold at a new 16-month high above £357, while French and German investors wanting to Buy Gold Today saw the price gain 0.6% from last week's start to €514 per ounce.

"In contrast to the rally seen in spring last year, which was mostly fuelled by speculative buying," says Wolfgang Wrzesniok at Heraeus, the German refining group, "gold demand this time is concentrated in physical buying, either in form of jewelry, bars, coins and in exchange-traded funds.

"The long-absent argument that physical gold provides a good safe haven in times of crisis seems to be reaching a bigger audience again. In contrast, the speculative positions on the COMEX [derivatives exchange] have recently risen as well but are still well below last year’s high.

"From a qualitative point of view the current price move has therefore all the ingredients to be more sustainable than the one last year, which ended after less than a month in a 200-dollar-drop in gold value."

To Buy Gold at Live Market Prices Today – and to claim a complimentary gram of professional-grade bullion stored on your behalf in Zurich, Switzerland – click through to visit BullionVault now...

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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