Gold News

Gold Rises as "World Needs Sound Money" in Face of US Government's Deficit-Inflation

Gold Prices jumped late-morning in London on Friday, rising 5.4% from yesterday's three-week low against the Dollar and touching a five-week high above £500 an ounce for British investors.

World equities caught up with one-half of Thursday's near-7% gain in US stocks, while crude oil ticked lower from $58 per barrel.

Government bond prices rose, pushing 10-year US Treasury yields down eight points to 3.77%. Wild volatility on the currency markets left the major cross unchanged from the start of Asian trade, despite news that Germany – Europe's largest economy, and third in the world after the US and Japan – officially slid into recession by end-Sept.

"Gold found support at the $700 level yesterday," notes Friday's comment from Mitsui, the precious metals dealer in London.

"Given the strong physical demand globally, expect the $680-$700 area to remain key support for the short term."

But "some investors aren't convinced the rally will be sustained," reckons Wallace Ng, a Gold Bullion and silver trader in Hong Kong for Fortis Bank, "because the Dollar may strengthen and no one worries about inflation now."

Inflation in Europe held flat between Sept. and Oct., new data showed today, with the cost of living rising 3.2% year-on-year on average for the region's 320 million citizens.

Month-on-month, today's US import price inflation was expected to show a 4% drop.

"Discipline in the global economy is needed to foster stability and help balance short-term and long-term prosperity more appropriately," said Jean-Claude Trichet – head of the European Central Bank (ECB) – in a speech ahead of this weekend's G20 summit of world leaders in Washington.

Now widely reviled for raising interest rates on the Euro in July to fight inflation – even as the world's largest economic zone was beginning to contract – M.Trichet spoke at length on the "exceptional liquidity support by central banks" to the financial sector.

But "if we are to 'build together the capitalism of the future,' as [French president] Sarkozy puts it," writes economist and author Judy Shelton for the Wall Street Journal today, "the world needs sound money.

"Does that mean going back to a Gold Standard, or gold-based international monetary system? Perhaps so; it's hard to imagine a more universally accepted standard of value."

(To learn more about the Gold Standard & Its Demise read here...)

"China should have at least several thousand tons of gold in its reserves, five to six times the officially announced 600 tonnes," said Hou Huimin, vice-chair of the China Gold Association, to Bloomberg News in Beijing today.

At today's AM Gold Fix, Beijing's official gold-hoard of 600 tonnes was worth just $14 billion – less than 1% of its total foreign currency reserves of $1.9 trillion, the vast bulk of it held in US Treasury bonds and notes.

"There's no doubt that gold would be attractive," reckons Kenichiro Ikezawa, manager of $3 billion in assets at Daiwa SB Investments in Tokyo, "as US debt is likely to swell.

"In the long term, both the Dollar and Treasuries will probably weaken. It's possible that China will buy more gold, though the country is likely to do so gradually."

The US Treasury yesterday reported an all-time record budget deficit for October, with outlays outweighing income by $237 billion.

Thanks to the Treasury buying $115 billion of equity in major private banks – as well as $21.5bn of mortgage-backed securities from Fannie Mae and Freddie Mac – government spending accounted for $1 in every $3 spent in the US economy last month.

Gold Mining production, in contrast, continues to contract, and now "over 80% of current mined gold production is over 15 years old," reports Lawrence Williams for MineWeb today after attending RBC's gold seminar in London.

"Some big mines are nearing the ends of their days, ore grades are falling, underground mines keep getting deeper, costs are rising and junior gold exploration has come to an abrupt halt" thanks to the global credit crunch hitting higher-risk fund raising.

Pierre Lassonde – the veteran gold analyst, co-founder of Franco Nevada Mining, acting chairman of the World Gold Council (WGC), and former head of world No.2 Newmont Mining – told the conference that global Gold Mining production is likely to fall around 7% over the next few years, "possibly more."

Despite near-term risks due to the ongoing financial turmoil affecting all investment flows outside government bonds, "Gold's fundamentals on the supply/demand side remain strong in terms of being price supportive," he believes.

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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