Gold News

Gold Jumps 1.8% to 7-Session High as Central Bank "Vigilance" on Inflation Fails to Convince

Gold Prices hit a 7-session high of $884 per ounce in early New York trade on Thursday, gaining as world stock markets held flat and the US Dollar fell on the currency markets.

Crude oil dropped more than a dollar from yesterday's new record high of $123.93 per barrel, while government bond prices rose, pushing the yields offered to new buyers lower.

"Inflation rates have risen significantly since autumn," said Jean-Claude Trichet, head of the European Central Bank, after keeping Euro interest rates on hold today at 4.0%.

"As we have said, inflation rates are expected to remain high for a rather protracted period of time before gradually declining again."

The Euro gained almost 1.5¢ on the ECB's decision, while the Gold Price – which showed a near-perfect correlation of 0.97 with the Euro/Dollar exchange rate at the start of this year – gained 1.8%.

Last week Gold and the Euro showed a daily correlation of just 0.51.

"The current bounce back above $870 per ounce we do not believe will be sustained," reckons an analyst at J.P.Morgan, "as central banks are showing stronger inflation vigilance currently, which removes one of the key positives for gold.

"Some physical buying is protecting the $850 per ounce area, but long liquidation will cap the upside."

Central-bank "vigilance" on inflation, however, now means Eurozone interest rates barely higher than rises in Germany's cost of living index. US interest rates are half the current level of consumer-price inflation.

The Gold Market leapt by 57% between Aug. and March as the Federal Reserve set about slashing the price of Dollars. And following the 15% drop in world Gold Prices of the last seven weeks, the speculative froth has clearly come off.

"The global gold book" of investors betting on rising Gold Prices through exchange-traded derivatives and trust-fund shares "is now at its lowest level since the week of 18 Sept.," notes Mitsui – the precious metals dealer – "when Gold was trading at $715."

Meantime in the US housing market – home to the subprime crisis which sparked the Fed's rate-cutting campaign – "there are signs the worst is over" claims Elvis Picardo, an independent investment strategist writing for Reuters.

The S&P's five largest homebuilding stocks have gained 11% so far this year, he notes, after losing more than two-thirds of their value from Jan. 2006 – proving that "investors are cautiously picking up the pieces," Picardo believes

Writing in the Wall Street Journal, Cyril Moulle-Berteaux – a managing partner at the Traxis Partners hedge fund in New York, writing for the Wall Street Journal – says today that "housing led us into this credit crisis and this recession. It is likely to lead us out."

Mortgage repayments "now take 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer," says Moulle-Berteaux. He also dismisses the idea that "house prices need to fall another 30%" simply because they remain 30% above their long-term inflation-adjusted average.

But like Picardo and Paulson, however, Moulle-Berteaux doesn't consider the possibility that US house prices will overshoot on the downside.

Last week the co-founder of KB Home, the fifth-largest homebuilder in the US, forecast a further 20% drop in average house prices due to "a big inventory of unsold, unoccupied homes that’s going to take three or four years to clear out."

"I don’t think we’re anywhere near a bottom in housing," Eli Broad told Bloomberg at a conference in Beverly Hills, California.

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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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