Gold Price Up, Silver Slips with Industrial Metals, as Libya Chaos Drives Oil & Inflation Higher, Real Interest Rates Fall

The Gold Price rose further in London trade Thursday morning, hitting new 2011 highs for Dollar investors as Brent crude oil jumped to $119 per barrel and a raft of economic analysis warned of "stagflation" ahead for the global economy.

Silver Prices ticked lower with platinum and palladium – metals which also find the bulk of their demand from industry, rather than investment or jewelry.

Saudi Arabia meantime offered to match failed Libyan supplies of crude oil, as new estimates said output from Africa's 3rd largest producer fell by two-thirds since unrest first spilled into rebellion against Colonel Gaddafi's regime a week ago.

British prime minister David Cameron apologized for failing to evacuate UK citizens  from what one national called the "mass hysteria" at Tripoli airport.

German magazine Spiegel said Berlin has sent three warships carrying 600 soldiers towards Libya's coast.
 
"This move in Gold right now is acutely about the Middle East," reckons James Dailey, portfolio manager at the $125 million private-client firm Team Asset Strategy in Indianapolis.

"The trade is about fear but people are viewing it as an extension of the inflation trade."

"If unrest spreads even further afield or becomes more violent, gold will benefit further as a safe haven," says Darren Heathcote, head of trading at Investec Australia, also speaking to Reuters.

Friday has been deemed a "Day of Rage" against Israeli settlement of the West Bank by opposition Palestinian politicians. The same phrase is being used to call for protests in Saudi capital Riyadh on March 11th.

"The oil market cannot accommodate another disruption in our view, with the problems in Libya potentially absorbing half of Opec's spare capacity," says Goldman Sachs analyst Jeffrey Currie in a note.

World stock markets meantime fell for the fifth day running on Thursday.

The "break-even" inflation rate implied by index-linked US Treasury bonds pushed upwards again, reaching its highest level since July 2008.

"A detailed scrutiny reveals that the move follows a stagflation concern" says Bank of America analysis of the US Treasury bond market, noting that real interest rates – accounting for that rising expectation for inflation – have in fact fallen.

"In fact," says James Zhang at Standard Bank today, "the probability the futures market assigns to a [US] rate hike by year-end has declined in recent weeks, from 36.8% at the start of January, to only 25% yesterday.

"We read [that] decline in probability as concern over growth...[Even] putting Middle East risks aside, the rapidly declining real interest rate is bullish for the Gold Price."

Food prices have sunk this week from new recod highs as energy costs have jumped, with Chicago wheat contracts losing 10% by the end of Wednesday's trade.

"The economy is in a much stronger position to handle" rising energy prices, claimed US Treasury secretary Timothy Geithner at a Bloomberg event yesterday.

"Central banks have a lot of experience in managing these things."

Back in the gold market, "The closest resistance is at January high 1423 followed by record high 1431," notes Scotia Mocatta.

Precious metal prices "again diverged on Wednesday" says another wholesale dealer, with industrial metals platinum and palladium both falling as gold and silver rose.

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