Gold News

Gold Price Jumps to New Dollar Record as Euro Breaks $1.50 on Fed's Failed Interest-Rate Policy

Spot Gold leapt to new record highs above $964.50 per ounce early in London on Wednesday, gaining more than 3.9% from Tuesday’s low as European stock markets slipped back and the US Dollar slid towards new all-time lows on the currency markets.

Breaching $1.50 for the first time ever today, the European single currency has now gained 12.7% against the Dollar since the Federal Reserve began slashing US interest rates in Aug. 2007.

The price of Gold has outpaced the Euro, however, gaining 47% vs. the Dollar and 31% vs. the single currency itself.

Fed chairman Ben Bernanke will today give his semi-annual testimony to the Joint Economic Committee in Washington, and since he last went to Congress, Bernanke’s policy team has cut the key US lending rate by a further 150 basis points, down to a three-year low of 3.0%.

But home prices have continued to sink regardless, falling at their fastest pace on record during 2007 while the S&P 500 index of US equities has lost 6.4% of its value.

Wholesale prices for US businesses, on the other hand, increased at a 27-year record pace in Jan., and “normally one would expect high inflation data to give a currency a boost,” as John Hardy notes for Saxo Bank in London today.

“But the focus here is on the Fed's lack of inflation-fighting credibility,” he adds – and the Fed remains fixated on trying to revive asset prices, if only in nominal terms, abandoning all pretence of managing the Dollar as a stable store of value for US households and business.

Even after the wholesale numbers were released Tuesday, Fed vice-chairman Donald Kohn said that the looming US recession remains a “greater threat” than rising prices. Now with New Home Sales figures due later today – and with Personal Consumption Inflation due out Friday – “it's crunch time for the Dollar,” reckons Yuji Saito, head of foreign-exchange in Tokyo for Societe Generale, the ailing French banking giant.

Analysts at Bank of America believe the Dollar will now fall to new record lows on its trade-weighted index “within weeks”, while Chicago interest-rate futures put a mere 4% chance on another 25-basis point cut from the Fed when it next meets on March 18th.

The other 96% of futures betting all backs a full 50-point cut.

In contrast “Germany's business sentiment was unexpectedly strong,” notes Ryohei Muramatsu at Commerzbank of yesterday’s surprise Ifo report, so “the ECB is likely to keep borrowing costs unchanged.”

But that may not be enough to slow the rising rate of inflation in the 14-nation Eurozone, where the region’s broad M3 measure of money supply grew by 11.5% in the year to Jan. the ECB said today.

Loans to financial intermediaries such as stock-brokers rose by 25.5% year-on-year.

Today’s new highs in world Gold Prices still came only in US Dollar terms, however, as the European single currency reached $1.5087 and the British Pound touched a new high for 2008 so far at $1.9970.

Buoyed by news that German import-price inflation shot to 5.2% annualized in Jan. – the fastest rate of import-price inflation since Aug.2006, and a sharp jump from Dec.’s 3.5% increase – the single currency capped the Gold Price in Euros below €637 per ounce, more than 1% off its top of last week.

The Euro also reached a seven-week high against the Japanese Yen, which stayed flat against the Dollar  while Tokyo’s Nikkei stock index added 1.5%.

Australia’s ASX ended at a three-week high. The Hang Seng in Hong Kong gained 3.2% for the day.

On their last day as the most-active contract at the Tocom in Tokyo, Gold Market futures traded for Dec. delivery rose 2.3% today. The Feb. 2009 contract will now become the benchmark after closing the session equal to $971.03 per ounce.

For British investors wanting to Buy Gold today the price moved back above £482 per ounce, but it still held more than 1% below the record top of last week as the Pound jumped on confirmation of 2.9% annualized GDP growth in the last three months of 2007.

The FTSE in London fell 0.7% despite that news, whilst the faded hope of lower Eurozone interest rates helped the German Dax give back one-third of Tuesday’s 1.5% gain.

In Zurich, shares in UBS – the world’s largest wealth management group – lost 0.7% ahead of today’s extraordinary general meeting (EGM), where stockholders will vote on a $12.7 billion injection from state-owned wealth funds based in Singapore and the Middle East.

Elsewhere in the commodity markets, the falling Dollar helped take crude oil above $102 per barrel – a new all-time high – and all base metals traded at the London Metal Exchange pushed higher.

In soft commodities – where the current run of high prices is evoking “the Maltusian spectre of global food shortages” according to the Financial Times today – wheat and corn futures slipped, while sugar, cocoa and coffee gained around 1.5% on average.

Global stockpiles of major oilseeds such as soybeans have reached a four-year low amounting to less than two months of consumption, reckons Thomas Mielke, head of the OilWorld consultancy in Hamburg, Gemany.

Today China reported 28.1% growth in its cotton imports last month from Jan. ‘07.

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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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