Gold Again Slips Sub-$1100 But "Don't Sell" Says SocGen, as "Long Emergency" in Western Debt Beckons
Gold Prices slipped back from an overnight rally Tuesday morning in London, edging again below $1100 an ounce for US investors as world stock markets ticked higher along with government bonds.
US crude oil contracts fell towards $81 per barrel, even as the Dollar eased back on the currency market, slipping through $1.50 per Pound and $1.35 per Euro.
The Gold Price for UK and Euro investors held 0.5% above Monday's lows at £732 and €814 an ounce respectively.
"The case for gold is clear enough, but when should we look to sell?" asks Dylan Grice in his strategy view, Popular Delusions, from French bank Société Générale's London office today.
Once again comparing US Fed chairman Ben Bernanke to Rudolf von Havenstein – the Reichsbank president who presided over Germany's hyperinflation of the early 1920s – "The political winds in countries with central banks are a long way from blowing in the direction of fiscal rectitude," says Grice, noting that "Talk is very cheap" when it comes to raising interest rates.
Only a dramatic crisis has ever make curing inflation "politically feasible" in the past, says the SocGen strategist – and the current political consensus says inflation is actually helpful (Read: On Walton Mountain here...)
Calling today's Western public finances "unsustainable" and government leverage "explosive", Grice "A government funding crisis is both inevitable and necessary [but] Dubai and Greece are merely the first claps of thunder in what is going to be a long emergency.
"Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. [But until then], the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything okay.
Meantime, "the outlook will remain favorable for gold...I own gold because I'm worried about the long-term solvency of developed market governments."
New data today showed consumer-price inflation in the UK – where the Bank of England has created £200 billion to buy government debt in the last 12 months – running at twice the European average last month.
Slipping from 3.5% to 3.0% year-on-year, CPI inflation held at the government's "upper tolerance". Excluding the Sterling Crash and oil-price peak of mid-2008, the older, long-run Retail Price Index (excluding mortgages) rose to an 18-year high on its underlying 3-month average, pushing up to 4.3%.
The two-decade RPIX average is 3.4%.
"These levels remain way above anything that the [Bank of England] can feel comfortable with," says Marc Ostwald of Monument Securities, quoted by the FT's Alpha blog.
"[There's] the strong possibility that inflation may 'stabilize' above target."
Fixed-income UK gilts nevertheless rose on the news, pushing the yield offered by 10-year government bonds down to a new 2010 low of 3.91%.
US Treasuries and German Bunds also rose in price, knocking their 10-year yields down to 3.66% and 3.06% respectively.
Silver meantime fell back after bouncing to last week's close above $17.00 an ounce, dropping some 2% in early London trade but holding north of Monday's low at $16.62.
On the political front, and after defending the record $177 billion rescue of US mortgage lenders Fannie Mae and Freddie Mac before Congress yesterday, "I think China will decide ultimately it's in their interest" to let the Yuan rise against the Dollar, US Treasury secretary Timothy Geithner then told Fox TV.
"The problem with inflexible exchange rates, like China's, is not necessarily that it costs the US – or any other country – jobs," writes Steven Barrow, chief currency strategist at Standard Bank in London today.
"The real problem is that resisting Dollar weakness creates excess liquidity which fuels bubbles both in China, and in the rest of the world."
"I think we already have a Gold Standard created by the market place," said private-wealth manager and investment author Marc Faber last week on CNBC.
"We have the Gold ETFs that have proliferated, and we have more and more physical buying of gold."
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