Gold Bullish Despite Frightening Deflation in Money Supply
Commodities / Gold and Silver 2010 May 27, 2010 - 08:28 AM GMTBy: Adrian_Ash
THE PRICE OF PHYSICAL GOLD in wholesale dealing slipped from an early 6-session high in London on Thursday, ticking back to $1207 an ounce but remaining 3.1% higher for May-to-date.
World stock markets rallied further, cutting more than a third of this month's 8% losses.
Government bonds retreated and the Euro reversed Wednesday's losses – briefly trading above $1.23 – after the Beijing authorities said that reports they are reviewing China's Eurozone bond holdings were "groundless".
US crude oil contracts jumped sharply once more, hitting $73 per barrel.
Both the gold price in Sterling and in Euros dropped 1.7% from 1-week highs hit overnight.
Silver investment bars held unchanged from the start of May near $18.40 an ounce.
"There are increased signs of risk easing," notes Walter de Wet at Standard Bank, albeit "from very high levels.
"Emerging-market currencies are bouncing back, the US 10-year bond yield is off it lows – up from 3.10% to 3.25% this morning – and stock market volatility in Europe and the US is down.
"Despite the risk easing, gold remains well supported above $1200. Investor interest remains high."
The US Mint confirmed Wednesday that May has seen the strongest sales of its gold coins since Dec. 2008.
New York's SPDR Gold Trust added little to Tuesday's 30-tonne addition of bullion yesterday, holding May's inflows at a 14-month record above 120 tonnes of gold bullion – some 9.3% growth.
"Gold remains well-supported," says Axel Rudolph, technical analyst at Commerzbank's London office.
"Last week's sharp drop did not unduly damage its uptrend."
"Investors are still concerned about the Europe debt crisis," said a Korean trader to Bloomberg earlier.
"Gold will continue to be bullish."
European stock markets extended yesterday's gains early Thursday, meantime, unwinding more than a third of May's 8% drop.
"I think [stock] are going to stabilize in this general area, and then we're going to have a significant move to the upside," reckons Traxis Partners hedge-fund manager Barton Biggs.
Looking at money-supply data, however, "It's frightening," says Professor Tim Congdon, now at International Monetary Research, after deflation in the United States' broad M3 measure was clocked at 9.6% annually.
"The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly."
M3 money supply is also shrinking in the Eurozone, Lombard Street Research reports, contracting by 2% in Germany and 3.4% in Spain from this time last year.
Italy's money supply is rising, in contrast – a fact that Lombard Street analysts link to Italian banks' willingness to continue buying new government debt issued by Rome.
"Multiple equilibria or 'bubbles' are possible," warned St.Louis Federal Reserve Bank president James Bullard at a conference in Stockholm, Sweden, today.
Commenting on the US central bank's commitment to keeping interest rates "exceptionally low" for "an extended period" of time, "Markets may confuse the policy with the 'interest rate peg' policy," said Bullard, "in which rates do not adjust in response to shocks" such as financial crises or inflation in the cost of living.
By Adrian Ash
BullionVault.com
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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2010
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