Gold News

Gold Unwinds Weekly Drop as Real Interest Rates Plunge, 2011 Fed Hike Seen as Less Likely Amid Japan & Middle-East Turmoil

Prices to Buy Gold rose above $1418 per ounce Friday lunchtime in London, reversing this week's earlier 2.4% drop as crude oil fell and world stock markets rose further after news of an immediate cease-fire by the Gaddafi regime in Libya, prompted by the United Nations' "no fly zone" agreement.

In the currency market, joint intervention by Japan, the US, UK, Germany, France and Italy knocked the Yen down 6.3% from Thursday's new all-time highs of ¥76.25 per Dollar – its fastest fall since the post-Lehmans' chaos of late 2008.

Major-economy government bonds slipped back but 10-year US interest rates held at 3.30%.

New data on Thursday showed US consumer prices rising 5.50% at an annualized rate in February.

"Real interest rates have been dropping like a stone again," says the commodities analysis team at South Africa's Standard Bank, noting a new 7-year low in inflation-linked US bond yields.

The chance of a Federal Reserve hike is now barely 1-in-5 by year's end, according to betting in the interest-rate futures market, down from better than 1-in-3 at the start of Jan.

"Furthermore, we view the Bank of Japan [vowing] to pursue powerful monetary easing and continue to pursue ample liquidity as bullish for gold," says Standard, forecasting $1500 per ounce once "seasonal weakness in the physical gold market" is over.

"The end of Q1 and Q2 typically see gold scrap volumes increase, which is likely to subdue the Gold Price."

More than 30 people were meantime reported killed in Yemen after the army opened fire on protesters after Friday prayers. In Bahrain, the British government advised UK nationals to quit the Saudi-oilfields neighbor immediately.

Authorities in Japan today raised the Fukushima distract radiation alert one notch. The New York Post reported that airport detectors in Dallas and Chicago were triggered by passengers arriving from Tokyo.

"A disruption to the Japanese economy will damage demand for precious metals from the electronics and other high-tech sectors of what is one of the world’s most advanced economies," says the latest Commodities Weekly from French bank and bullion dealer Natixis.

Japan’s electronics sector accounts for some 3% of total global gold off-take each year, says Natixis.

"Japanese consumers are also significant buyers of luxury items, with demand for gold and other precious metal jewellery likely to suffer from any hiatus in Japanese consumption."

Tokyo's Nikkei stock index continued to rally on Friday, cutting this week's losses to 10.1%.

Primarily destined for industrial use, meantime, Silver Bullion also ticked higher but held 2.3% lower from last week's record-high Friday finish vs. the US Dollar.

The sharp drop in the Yen currency drove the price to Buy Gold back up towards last week's finish for Japanese investors.

The Gold Price in both Canadian and Aussie Dollars ended the week near 2011 highs, trading 1.3% and 2.2% from last Friday respectively.

Only the Swiss Franc and Euro price of gold stayed significantly lower – down 2.5% and 1.4% respectively from last weekend.

"Peripheral [Eurozone] rates on five-year CDS [bond insurance] have risen since the beginning of the month," notes Natixis, "in part influenced by further downgrades to Spain and Portugal.

"But the price of gold denominated in Euros has dropped by €36/oz over the same period" – a switch from the close correlation between Eurozone CDS and Gold Prices seen since early 2010.

Rumors claimed on Friday that the European Central Bank was actively buying Portuguese government bonds once again, in a bid to drive market yields down from this month's new records above 7%.

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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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