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Spot Gold "Choppy, Indecisive" as US Calls Chinese Yuan "Undervalued", Threat of QEII in UK Makes Sterling "A Sell"

Spot Gold and Silver Prices were little changed against the US Dollar by Thursday lunchtime in London, despite what one dealer called "a very choppy and volatile market".

Asian equities failed to pick up from yesterday's 1.2% gain in US stocks, but European shares rose towards 6-month highs.

Crude oil held steady above $82 per barrel and base metals rose

Overnight, "Traders took advantage of the dip [in Gold Prices] and short-covered," says a Hong Kong dealer, but the resulting rallies were "minimal and short-lived."

"This is a very indecisive market struggling with two opposite forces," says Swiss refiner MKS's finance division – "long liquidation and bargain-buying."

Over on the currency market the Dollar rallied but the Euro rose faster, hitting $1.4050 – and also jumping to a 6-month high vs. the British Pound – after US Treasury secretary Tim Geithner told the Wall Street Journal that the world's major reserve currencies are "roughly in alignment" but the Chinese Yuan is "undervalued by any measure".

The Gold Price thus slipped further in Euros on Thursday morning – briefly dipping to a two-week low beneath €30,850 per kilo – but recovered from an early dip versus the Dollar, Sterling and Japanese Yen.

Preparing for this weekend's G20 summit of leading economic powers in Seoul, "We would like countries to move toward a set of simple norms on exchange rate policy," said Geithner, inviting trade-surplus nations "to put a little more flesh" on their plans for helping the global economy to "rebalance".

New data today showed Japanese industrial activity contracting in Sept., while Germany's manufacturing and service sectors both expanded sharply.

Berlin today raised Germany's forecast GDP growth for 2010 to 3.4%.

UK Retail Sales meantime showed their second monthly fall in succession, and new mortgage approvals also fell.

Raising bank-deposit interest rates to 2.5% on Tuesday, Beijing overnight reported a slight slowdown in China's GDP growth for the July-Sept quarter., slipping to 9.6% year-on-year from 10.3%.

China's rate of consumer-price inflation rose to 3.6% last month, the official statistics agency added, with nine-tenths of the rise driven by food and housing costs according to a spokesman.

"Today's [US] data flow could have a significant impact across the precious metals complex," says Standard Bank's London team in a note, "with gold and silver particularly vulnerable" to any signs of improvement.

US consultancy Medley Global Advisors said Wednesday that the Federal Reserve will create $500 billion over the next 6 months, using the money to buy Treasury bonds and so push longer-term interest rates lower still.

"We believe that a Gold Price of $1350 is consistent with $500bn of quantitative easing," says Standard.

"Whenever you print money, people look for a refuge – gold," said financial author and money-manager Jim Rogers, former hedge-fund partner of George Soros, in an interview last week.

"If the central bank prints enough money," he joked to CNBC this morning, "the [Dow Jones index] could go to 50,000 but we'd all still be losing money in stocks, because the money would be worthless."

US Treasury bonds were little changed as the start of New York trading drew near on Thursday, but the rise in UK gilts continued from yesterday's coalition government "austerity" budget review.

Ten-year gilt yields fell as prices rose, dropping towards August's record-low of 2.92%.

"The risk of renewed quantitative easing makes Sterling a sell," says a note from UBS analysts, after UK chancellor George Osborne told the BBC that his new austerity budget has "some caution built in to it, and there is of course the freedom for the Bank of England to deploy monetary-policy tools as well."

In sharp contrast, German chancellor Angela Merkel yesterday called for central bankers to "be thinking about exit strategies" from current liquidity support.

"The spread [for 'swap' rates between gilt yields and German Bunds] is the widest since the advent of the Euro," notes Lloyds TSB's currency strategist Adrian Schmidt, thanks to UK interest rates falling as Euro rates hold steady.
Wednesday's UK money-supply data "showed an all-time low rate of growth," he adds – quoted by the FT's Alpha blog – and the Bank of England's latest minutes "showed a vote...and some sympathy for the idea of QEII."

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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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