Gold News

Gold Hits One-Week High on $120 Oil; Central Bankers Blame Inflation on Commodities, Ignore Their Own Role

Gold Prices hit a one-week high at the London opening on Tuesday, unwinding one-third of the last fortnight's 12% plunge as crude oil hit new record highs above $120 per barrel.

World stock markets fell, led by banks and home-building stocks, despite Bank of America confirming that it will push ahead with its $4.1 billion purchase of Countrywide, the biggest US mortgage lender.

"Following the UK bank holiday [on Monday], markets could be busy today as they assess yesterday's price movements," says Walter de Wet in today's Gold Market note from Standard Bank.

"Dollar weakness throughout the day gave further support to metal prices. [And] as with the platinum group [of industrial] metals, supply problems dominate crude oil and copper production."

Last Thursday, the world's No.2 aluminum producer, Rio Tinto, cut output at its New Zealand smelter by 5% in response to power cuts caused by a low rainfall.

Friday saw the government of Congo – the world's No.1 source of cobalt, used in batteries and jet engines – request a cut in mining activity after key power cables were stolen.

Goldman Sachs now says "supply shortfalls" will force crude oil prices up to $150 and even $200 per barrel by 2010; lack of energy-grid investment closed South Africa's platinum and gold mining industry for five days in late January; the worst drought in over a century threatens power supplies in central and southern Chile – the world's largest copper exporter – where hydro-electric plants account for up to 70% of the energy supplied to mines operated by Antofagasta, Anglo American and Freeport-McMoRan Copper & Gold amongst others.

"[Surging commodity prices] are a very important phenomenon on a global level," said Jean-Claude Trichet, head of the European Central Bank, as chairman of the G10 meeting in Basel, Switzerland.

The leading industrialized Western economies face "significant inflation risks," he went on. But Trichet neglected to mention the impact of Western monetary policy on the cost of living.

Last week the ECB – along with the Federal Reserve and Swiss National Bank – raised its emergency "Term Auction" loans to the banking sector by one half. The quantity of money in the European economy, formerly a key indicator for the ECB, continues to grow above 11% per year.

When it took responsibility for Eurozone interest rates at the start of this decade, the ECB initially targeted 4.5% annual growth in the M3 money supply. (Follow the Money here...)

Today the Eurostat data agency reported a surge in costs and prices for the industrial sector, now rising by 6.7% year-on-year across the 27-member European Union.

"There's a combination of physical Gold Buying and short-covering at the lows, but I think the market will still be in a range of $850 to $880 for the time being," said a Hong Kong dealer to Reuters overnight.

"Holdings on the ETF seem to be dropping a lot, so I don't know what people really think about the market right now."

In India – the world's hungriest market for physical Gold Bullion – tomorrow's Akshaya Thrithiya Gold Festival spurred strong demand this morning according to local Gold Dealers.

"Gold has come considerably down from $1,030 an ounce to $845 an ounce," noted Samir Shah of Riddhi Siddhi Bullion in Zaveri at the weekend, "and we expect good volumes this year both in jewelry as well as coins."

"Prices are at a three-month low," agrees Ashish Pethe, a partner at Waman Hari Pethe Jewelers in Dadar, "but they are still 20% higher than last year. Given the levels it reached in between, we expect good sales volume.

"Gold is proving to be a sound investment option."

Western stock markets meantime lost 0.6% today ahead of the US open, with Zurich-based UBS – formerly the world's largest wealth management group – losing 5.4% of its value on news of 5,500 job cuts and a fire-sale of distressed mortgage-bond investments.

UBS will sell $22 billion of US subprime and "alt-A" assets to Blackrock Inc. for $15bn – a 31% haircut.

Morgan Stanley sparked a sale of home-building stocks here in London by issuing a series of broker downgrades on the sector. Yesterday Ben Bernanke, head of the US central bank, urged mortgage lenders to actively shrink their balance-sheets by cutting the value of loans outstanding to match current home-market prices.

"In some cases, when the source of the problem is a decline of the value of the home well below the mortgage's principal balance," the Fed chairman said during a speech at the Columbia Business School, "the best solution may be a writedown of principal or other permanent modification of the loan."

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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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