Gold News

Global Inflation Makes "Powerful Medicine" for Gold Investment as Scrap Metal Pours onto Market from Cash-Strapped Consumers

Spot Gold Prices pushed higher as world equities fell early Wednesday, rising above last week's close against the Euro and British Pound, and recovering all but $5 of Monday's sharp $30 drop for US investors before dropping back to $884 an ounce.

Crude oil slipped below $48 per barrel, while government bond prices rose, taking 10-year US Treasury yields back down to 2.88% per year.

"Investors will drive the next leg of this bull market in gold, setting a new high above $1,000 in 2009 and with a real possibility of $1,100 per ounce," said Philip Klapwijk, chairman of GFMS, at the independent consultancy's Gold Survey launch here in London yesterday.

"We have seen people in Europe Buying Gold in quantities more typical of the Middle East and Asia...particularly in Germany and Switzerland.

"Inflation is the inevitable consequence of today's rapid money-supply growth and quantitative easing. It's extremely powerful medicine for Gold Investment."

Today Richard Fisher, president of the Dallas Federal Reserve, told a conference in Tokyo that the US central bank is "duty bound to apply every tool" to avoiding deflation in the economy.

A source close to General Motors told the Reuters news-wire that the US auto-maker is about to declare bankruptcy, while German chancellor Angela Merkel extended to €5 billion a subsidy for consumers buying new, fuel-efficient cars.

The Wall Street Journal said that "Troubled Asset" cash relief will be extended by the Federal Reserve to US life insurance companies, sparking a sharp rally in their stock prices.

"We still see systemic risk in the financial system," wrote Walter de Wet for Standard Bank's precious metals note this morning, because "while the stimulus packages announced [at the G20 summit] last week should assist global growth, we doubt it can cure the problems entrenched in the financial system."

Attributing gold's failure to hold above $1,000 in Feb. to the "astounding" flow of scrap metal, however, GFMS's Klapwijk said at Tuesday's conference that recycled tonnage in the first three months of 2009 actually overtook new jewelry fabrication demand worldwide.

In full-year 2008, scrap-metal flows rose 27% to more than 1,200 tonnes, surging again to reach 500 tonnes in Q1 2009.

New jewelry demand, meantime, halved to just 420 tonnes, and traditional importers – such as world No.2, Turkey – have now become gold exporters, Klapwijk explained.

In the industrialized West, high-margin operations such as Cash4Gold – whose advert during this year's Superbowl featured late-80s rap star MC Hammer – have made selling gold easier for cash-strapped consumers.

One attendee put the flow of scrap metal far higher than GFMS's figure, perhaps at 1,000 tonnes for the first quarter. Gold-market historian Timothy Green said India last failed to import gold during the Great Depression of the 1930s.

The sharp drop in Gold Prices during the third-quarter of 2008 actually saw global jewelry demand surge, however, and "Gold would have fallen to $650 or lower" without that pick-up, GFMS believes.

But it's also "a concern for the stability" of Gold Prices, Klapwijk went on, that for the first time in many years de-hedging by Gold Mining companies "will be running at trivial levels" in 2009.

Major gold miners sold forward a total 3,420 tonnes of their future production by the end of the 1990s, locking in current prices for fear of further falls as gold's two-decade bear market wore on.

Reducing that "hedge book" by Buying Gold on the open market as prices tripled and more this decade, however, the outstanding total now owing sits below 485 tonnes – "well below the mid-1990s level," according to GFMS.

That means "De-hedging is on its last legs as a source of demand," said Philip Klapwijk on Tuesday.

Over on the currency markets, meantime, the Euro today fell yet again vs. the Dollar, sliding to a new one-week low of $1.3150 after Germany reported a sharper-than-expected drop in Factory Orders for February – down 38% from the same month last year.

Sterling also continued its rally against the single currency, hitting 5-week highs against the Euro on news that High Street price inflation, as reported by the British Retail Consortium, hit 2.0% last month.

The BRC blamed the rise on "the pass-through of Sterling's depreciation to consumer prices."

On a trade-weighted basis, the British Pound has now suffered its sharpest devaluation since the end of the Gold Standard in autumn 1931, losing almost one-third since this time in 2008.

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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