Gold Unmoved by Historic Rate-Cuts, But "Currency Debasement & Inflation" Loom Amid Competitive Devaluations
Gold Prices held in a tight $10 range in Asia and London on Thursday, unmoved by historic interest-rate cuts across Europe that buoyed French and German equities as returns-to-cash sank.
The European Central Bank (ECB) lopped 75-basis points off the cost of borrowing Euros, but held above the previous 2003 low of 2.0%, with its largest ever one-day reduction.
Sweden's Riksbank slashed 175-basis points off the cost of Krona, citing "rapid deterioration in economic activity" and promising to hold rates at the new 2.0% level for the coming year.
Here in London – and spying "a substantial risk" of deflationary depression (otherwise known as "undershooting the 2% Consumer-Price Inflation target in the medium term" in central-bank speak) – the Bank of England slashed 100-basis points off the cost of overnight loans, taking base rate to the very lowest level in its 314-year history.
Measured against inflation, the Bank's key lending rate now offers an annual loss of 2.2 pence in the Pound – the worst loss of purchasing power since May 1980.
In the last two months alone, and on a proportional basis, the Bank of England has slashed the returns paid to savers at the fastest pace since 1858.
"A round of competitive devaluation in neighboring economies would result in little material gains," says Tao Wang, head of economic research at UBS Securities in Beijing, referring to this week's cut in the Chinese Yuan's official exchange-rate value.
The Yuan has gained 8% vs. the Dollar this year, even as the US currency surged against everything else. Since Monday, however, the People's Bank of China has twice lowered the central peg of its permissible daily trading band. Currency futures now point to a 6% devaluation over the coming year.
"This is clearly a big shift in policy and we are now on alert," says Simon Derrick, head of currency trading at Bank of New York Mellon, to the Daily Telegraph.
"A temporary depreciation of the Yuan against the US Dollar by the PBoC cannot be ruled out," agrees Yiping Huang, Asia-Pacific economist at Citibank.
Back in London dealing today, the British Pound bounced from new record lows after the Bank of England decision, rising from a fresh six-and-a-half-year low of $1.4470 to the Dollar and gaining 0.6% from an all-time low vs. the Euro beneath €1.15.
The Euro recovered from a low of $1.2550, while the Gold Price in Euros ticked back towards a two-week low at €605 per ounce.
British investors seeking shelter from the Pound's worst losses since the Sterling Crisis of 1992 had earlier seen gold erase all of this week's losses-to-date at £532 per ounce.
"You've got a mass liquidation going on, and everything goes down in that environment," said Philip Manduca, head of investment at the $1.5bn ECU currency group, to CNBC on Wednesday.
"Gold will correlate with things it doesn't normally correlate to in extremis, and we are in extreme situations at present.
"The thing that will break gold out of this will be any sign of economic bounce, and you're going get that in the course of the next few months.
"The quantity of fiscal stimulus, optimism amongst consumers and business – whether founded or not...People just want to believe that it's going to come to an end someday soon, preferably tomorrow."
This up-turn will only feed "very real fears of a combination of currency debasement on the one hand and...inflation on the other," Manduca believes, defiant in his forecast that gold will reach and breach $1,000 in short order, going on to hit $2,000 in 2009.
Meantime in India – destination for one ounce of gold in every sold worldwide last year – a sharp rate-cut is now widely expected from the Reserve Bank this Saturday after consumer-price inflation fell to a seven-month low of 8.4% annually for last week.
"However, inflation for food articles rose to 10.43%," reports the Economic Times today, "against 9.93% a week ago."
"We have many buy orders at $750 levels," said one Mumbai Gold Dealer to Reuters overnight, but "physical off-take has slowed over the last two days."
"We could see sustained demand if we witness around $750-760," agreed Harshad Ajmera, head of Calcutta traders J.J.Gold House.
In the Gold Mining sector, meantime, a government auction of mining rights over the extensive copper-gold resources at Mount Diwalwal, southern Philippines, failed on Wednesday after "Nobody submitted a bid," in the words of the state-run Philippine Mining Development Corp.
Six foreign and local groups had been eligible to bid for the rights, with a floor set at $1.5 million plus $1m per year until 2013 and 5% royalties.
Across in southern Africa – formerly world No.1 for gold output – almost one-in-four drilling rigs at exploration firm Geosearch are now idle, reports Martin Creamer for MiningWeekly.
"We've probably had 30 rigs stopped," said chief operations officer Buster Shipster, pointing to the cessation of all drilling by Canada's Banro Inc. in the Democratic Republic of the Congo.
"Our feeling is that, certainly for the next six months, it's going to be quite a challenge."
Gold mining output in China – which over-took South Africa as the world's top producer in 2007 – will struggle to grow by 2% this year, said Hou Humin of the China Gold Association to Bloomberg this morning.
China's gold production rose 13% last year. But now "China's gold mine production growth is expected to slow as lower prices this year reduced supply from low-grade, high-cost mines," says Hou.