Gold News

Gold & Euro Slip vs. Dollar, But "Twin Deficits" Threaten US Credit Rating, Become Political Issue in Japan

Spot Gold prices rose to their best level since April 1st in London trade on Wednesday, gaining 0.5% to $928 an ounce before slipping back on a bounce in the Dollar.

The Euro retreated from a new 8-week high above $1.3720, while the British Pound sank 2¢ from its best level since Jan. on a sharp cut in the Bank of England's forecast for the UK economy.

The Gold Price in Sterling jumped to a four-session high of £610 an ounce.

"Gold will compete against equities for investment money," notes Walter de Wet's commodity team at Standard Bank. "But systemic risk in the financial system remains, and macro-economic growth concerns too, which should support gold buying.

Calling the strength of Gold ETF volumes "encouraging" in the face of world equities rallying by one-third since March, "We are also witnessing some support developing above $900 in the physical gold market," Standard Bank adds.

A new report from Commodity Online in Mumbai today sees Indian Gold Imports in 2009 halving from 2008 levels to an 8-year low near 200 tonnes.

Opening the Hard Assets New York convention yesterday, Philip Klapwijk of the GFMS consultancy said only negative real rates of interest and rapid money-supply inflation could explain why the Gold Price continues to overcome "negative fundamentals", while the silver market has moved into a "substantial surplus" thanks to collapsing industrial demand.

"We don't think the [financial] system is about to break down any more," says Don Smith, an economist at broker-dealer Icap in London, "and confidence is certainly coming back.

"But [the flow of new credit] is still only a trickle."

Tuesday saw the gap between overnight and 3-month interbank interest rates fall to the lowest level since before Lehman Brothers collapsed last September, signaling that "the worst of the global recession is over" according to the Financial Times.

European stocks meantime slipped 1.5% Wednesday morning, unwinding the last week of gains on news that Eurozone industrial output shrank by a fifth in March from a year earlier.

Falling energy prices last month pulled France's inflation rate down to a 52-year low of 0.1%.

"Growth of broad money and spending has slowed to a standstill, with painful consequences," said Mervyn King – the UK's chief central banker – at a London press conference this morning.

"Spare capacity is building and unemployment is rising. And the necessary adjustment of balance sheets is far from complete. There is, therefore, great uncertainty about the outlook."

The latest UK jobs data – leaked a day ahead of schedule – show unemployment at a 13-year high of 2.2 million. The Bank of England's central projection is now for a near-5% rate of contraction in the first half of 2009, followed by only "a relatively slow and protracted recovery."

Consumer-price inflation may not reach its 2% target until 2012, adds the Bank's new Inflation Report – seen as justification for announcing an extra £50 billion of Quantitative Easing last week.

UK inflation has spent 40 of the last 47 months above that 2.0% target, however.

"Increasing demand from recovering economies should put pressure on the supply/demand balance" of key commodities, says head of metals and mining at Ernst & Young Tim Williams in a new report, "with many capital projects in the mining industry deferred or cancelled.

"There will come a time when it becomes cheaper to build than buy. When that happens, expect [base] metals prices to set new highs."

Today the price of US crude oil ticked higher towards $60 per barrel, the new 6-month high broken Tuesday.

Government bond prices also rose, however, pushing German bund and UK gilt yields sharply lower as institutional buyers bet on interest rates staying lower for longer.

"For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition," says former comptroller of the currency David Walker in a letter to the Financial Times today.

"How can one justify bestowing a triple-A [credit] rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn; £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come...?"

Tuesday saw the "twin deficits" of American tax-payers – both fiscal and trade – rising yet again on the latest data.

The finance chief of Japan's Democratic Party today told the BBC that, if elected this year, its government would only continue to buy US Treasury debt denominated in Yen, not Dollars.

A poll in today's Yomiuri Shimbun put the current prime minister on 15% of the vote, with the Democratic Party on just 7% and almost two-thirds of the electorate as yet undecided.

As yet unannounced, an election in Japan – the world's No.2 creditor of the US Treasury – must be held by September.

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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