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Spot Gold Rallies vs. Dollars, Euro & Sterling as Global "Currency Crisis", Plus QEII, Makes Buying Gold "Understandable"

Spot Gold and silver prices rallied towards last week's closing levels Tuesday lunchtime in London, bouncing after world stock markets and commodities fell on reports of new bank-lending curbs in China.

Banking reserves must be raised by 0.5 percentage points to 17.5% of deposits, Goldman Sachs quoted government staff.

Now closely linked to daily moves in the Dollar Gold Price, the Euro currency slid to a 1-week low vs. the Dollar.

"As the Euro weakened versus Yen," says one Hong Kong Gold Bullion dealer, "long-liquidation [in precious metals] took over, despite a couple of rounds of short-covering by traders."

Gold and Silver Prices then rallied, however, rising from $1341 and $22.93 per ounce respectively, while European equities cut an earlier 1% drop and the US Dollar eased back on the currency market.

The Gold Price in Euros touched a 3-week high overnight at €31,400 per kilo.

British investors wanting to Buy Gold today saw the price move back above £850 per ounce.

"Watching the currency market closely, we will take decisive steps, including intervention, when needed," said Japanese prime minister Yoshihiko Noda this morning, repeating Tokyo's position after it attempted to weaken the Yen and support the Dollar at 15-year lows in mid-Sept.

Following Brazil's lead today, Thailand introduced a 15% tax on foreign investors' gains and interest payments. But "It won't change the Baht's [rising] direction," said a senior Bangkok dealer to Bloomberg, "because it's strong in line with other currencies worldwide."

"We live in a world of floating currencies, but excessive volatility is bad and to be avoided by common efforts at the world level," said Belgian central-bank chief – and European Central Bank policymaker – Guy Quaden yesterday.

"The financial crisis could escalate into a currency crisis," agrees the China Securities Journal said in a lead editorial, quoted by Reuters. "There will be no winner."

But ahead of US Treasury secretary Tim Geithner's decision – due Friday – on whether Beijing is a "currency manipulator" and should therefore suffer trade sanctions, "Currency reform does not equate to Yuan appreciation," the State Administration of Foreign Exchange says in a new report.

"The emphasis is more on the improvement of the currency-market mechanism."

Looking at the US Fed's widely-expected second round of quantitative easing, the Spot Gold market "is pricing in substantial QE already," writes Walter de Wet at Standard Bank in London today.

With flows of scrap-gold rising, plus a seasonal dip in Asian jewelry demand due at year-end, "a conservative approach by the Fed could see gold drop below $1300 in December," he says.

"For global liquidity to be consistent with the current gold price around $1350, the Fed would have to expand its balance sheet by $500bn. [But] should the Fed provide $1trn in additional QE, a Gold Price closer to $1400 should follow."

Loose US monetary policy yesterday led analysts at Goldman Sachs in New York yesterday raised the bank's three, six and 12-month targets for the Gold Price, forecasting a level of $1650 by Oct. 2011

"With US real interest rates [after inflation] pushing lower off the slowdown in the pace of the economic recovery – and the growing prospect of another round of quantitative easing – we expect gold to continue to climb," wrote David Greely and Damien Courvalin.

Bank of England policy-maker David Miles told an audience in Dublin on Monday that "These are not normal times, which is why there is a risk that monetary policy is normalized too quickly."

"Gold bugs are buying bullion for the understandable reason that central banks appear committed to printing more money: they fear that eventually this will lead to inflation," writes Phillip Coggan, former FT columnist and now capital-markets editor at The Economist, in his latest ButtonWood column for the magazine.

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Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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