Sterling Gold Near Record Highs as General Election Looms

By: GoldCore

Gold went from as low as $1,119/oz up to $1,128/oz in US trading before closing with a gain of 0.32%. It has range traded from $1,120/oz to $1,125/oz in Asian and European trading this morning. Gold is currently trading at $1,123/oz and in Euro and GBP terms, at €827/oz and £741/oz respectively.

Gold priced in sterling is still in an uptrend as seen in the chart. Gold is only up 11% in sterling terms in the last 12 months (March 19th, 2009) and after a long period of correction and consolidation may be set for further gains in the coming weeks in the run up to the expected election on May 6th.

The yellow metal is currently trading near a support area of £724-735/oz, and is trading well above its 50-day moving average. If prices climb above the record nominal high of £758/oz set earlier this month, the next resistance level would be the psychological level of £800/oz. If prices fell below the £724-735/oz area, then the metal may drop back to £670/oz area, which has been strong support since November.

Given the concerns about the recovery in the UK housing market, the deteriorating public finances and increasing economic uncertainty, there's more risk to the upside then the downside. We're seeing a significant demand for gold as a currency due to uncertainty regarding the outlook for currencies and sterling. The element of uncertainty about the looming British election on May 6th is important. Markets don't like uncertainty and this should see gold remain in a bull market in sterling for the foreseeable future.

Gold's record adjusted for inflation high in dollars was at $2,300/oz and the inflation adjusted sterling high was over £1,000/oz. Gold reached a record nominal high in sterling of over £300/oz on a few occasions in the early 1980s (see chart below) and that would equate to over £1,000/oz in today’s money. This shows that while sterling gold has had a nice run up in recent years it is not overvalued from a long term historical perspective.

Gold in British pounds in nominal terms (non-inflation adjusted) 1971-2010

Silver
Silver has range traded from $17.25/oz to $17.39/oz this morning in Asia. Silver is currently trading at $17.33/oz, €12.74/oz and £11.43/oz.

Platinum Group Metals
Platinum is trading at $1,628/oz and palladium is currently trading at $479/oz. Rhodium is at $2,520/oz.

News
Central bank demand for gold last year was the highest since 1964 and seems likely that this trend will remain for the foreseeable future due to currency and sovereign risk. Even with gold near record nominal highs, central bankers see the merits of having small allocations to gold for diversification purposes.

The euro has again come under pressure as EU leaders remain at loggerheads as to what to do about Greece. The recent misplaced optimism about some sort of bail-out package for Greece may be fading. Any sort of bail-out for Greece, under present EU rules may actually be illegal. Also of importance is the fact that political and legal considerations in Germany make any sort of support for some form of cash bailout extremely problematic for Angela Merkel.

The German government has not ruled out aid from the International Monetary Fund for Greece and has said that Greece had not yet asked for financial aid and so there had been no decision on help yet. "The German government does not rule out IMF support," the German government spokesman said.

Markets have so far remained sanguine about the geopolitical tensions between the US and China over the undervalued Chinese currency (along with Taiwan, Tiber, censorship etc.) but there is a growing risk that the simmering tensions could escalate. The letter from the 130 US House members was a dangerous step that could potentially backfire with China deciding to stop financing the massive and increasing US deficits by curtailing their purchases of US Treasurys. This could lead to the dollar falling in value in world markets and to long term interest rates rising.

This update can be found on the GoldCore blog here.

Mark O'Byrne

WINNERS MoneyMate and Investor Magazine Financial Analysts 2006

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