Gold News

Monsieur Trichet & Inspector Cluso

What did Gold make of the European Central Bank's first change to rates in 13 months...?

AS A PROUD MEMBER of that mongrel race which calls itself English, I'm naturally drawn to German lager, American cigarettes, French wine, Italian tailoring and Chinese takeaways.

   Mongrel is as mongrel does, after all. But just like every last Englishman since Edward III (who only spoke French) won at Crecy and Poitiers, I'm also constantly shamed by my lack of foreign language skills in the presence of anyone from overseas.

Take Jean-Claude Trichet, for instance. In common with everyone else from across the Channel we ever hear or speak to, the head of the European Central Bank handles English so well, you'd think that embarrassing les Anglais with their own language had become a requirement of French citizenship.

"Quite clearly we are not embarking on a stagflationary episode," Trichet told today's news conference at the ECB in Frankfurt. "At a global level, we have inflation, but we don't have stagnation...

"The risks to price stability have augmented since our last meeting...[but] our present qualification, with all due respect for the risks we have ahead of us, would be for moderate ongoing growth..."

Okay, so it's still central-bank speak, but it shows more clarity of thought – and a firmer grasp of the English language – than Alan Greenspan ever managed! And compared with his central banking colleagues today, Trichet can befuddle and bedazzle with far greater grace than Bernanke or King and their poor imitations of Anglophone obfuscation.

Yes, every so often, the head of the European Central Bank does slip into Inspector Cluso-style constructions. But he's never quite Yoda ("Raising interest rates we must be..."), nor quite as telling as George W.Bush ("One of my concerns is that mental health care [in the army] not be as good as it can possibly be...").

Monsieur Trichet did make one slip during Thursday's press conference, however. In fact, he kept on repeating it.

"If we were not credible [in fighting inflation]," he said in reply to at least three journalists' questions, "where would be our five-year, 10 year, 20 year, 50 years' interest rate?"

The cost of borrowing today, in other words, to fund Eurozone government spending to 2058 depends on how well the ECB defends the value of money. And M.Trichet reckons he's doing a pretty good job.

"Sovereign governments are issuing new bonds with 50-year terms [and] thanks to our vigilance [against inflation], they can raise these funds at just 4.91% per year," he restated.

But the Gold Market, in sharp contrast, is less sure of the ECB's inflation-fighting credentials. The Gold Price in Euros has doubled since M.Trichet took over as head of the Bank. Where's the "inflation vigilance" – meaning a stout defense of money's purchasing power – in that?

Nor does the currency market feel confident about how long the ECB will defend its honor – and defend the Euro – against the political clamor for lower rates, either. The Dollar-price of Euros actually fell on news of the ECB's rate hike today. And no doubt that's just as M.Trichet would wish. Because any more Euro forte to contend with, and populist politicians led by Nicholas Sarkozy, the French president, would only gain fresh ammunition for demanding an immediate switch to devaluation.

"How can we compete with Boeing...with a 30% overvaluation of the Euro against the Dollar?" Sarkozy demanded on Monday when talking about the troubles at joint Franco-German aeroplane maker Airbus.

"The ECB should ask itself the question of economic growth in Europe and not only of inflation."

The same day, even the German finance minister, Peer Steinbruck, warned the ECB against "sending the wrong signal with an interest-rate increase." And the next day –with the ECB getting ready to pull the trigger on its first change to Eurozone interest rates in 13 months – Spanish prime minister Jose-Luis Rodriguez Zapatero chipped in, saying M.Trichet should be "more responsible".

Remember – M.Trichet today justified his committee's unanimous decision to raise Eurozone interest rates by appealing to the current low cost of raising long-term government finance. Politicians, on the other hand, would like him to set interest rates lower in the hope of boosting the economy.

Which will it be? The Gold Price in Euros didn't wait to find out today. After an initial dip on Trichet's comments, it jumped to new highs for the day, regaining the three-month highs touched at the start of this week near €599 per ounce.

Might it break €600 again? With Eurozone inflation now running at a record rate of 4.0% per year, new investment demand from German, French, Italian, Irish, Portuguese and Spanish investors here at BullionVault just continues to grow.

Because just like the European Central Bank and its member states agreed in 2004 – last time they agreed to cap how much Gold they sell each year, "dis-hoarding" the stockpiles built up when their money really was good as gold – Gold remains "an important element" of the world's monetary system today.

Only difference is, private individuals now need to hold their own stock of monetary metal. Central bankers and government leaders gave up holding it for you long ago.

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.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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