Gold Jumps $50 in 21 Hours as Fed Devalues the Dollar with $600bn QE2
Commodities / Gold and Silver 2010 Nov 04, 2010 - 09:28 AM GMTBy: Adrian_Ash
THE PRICE OF GOLD in wholesale dealing leapt at the start of US trading on Thursday, extending an overnight rise to within 0.5% of last month's record highs – and gaining $50 per ounce inside 21 hours – as the US Dollar sank in response to the Federal Reserve's hotly-anticipated "QEII" asset purchase program.
"Currency devaluation remains firmly en vogue," said one London bullion dealer this morning.
The weakening Dollar "is what's helping gold," notes commodity strategist Jesper Dannesboe at SocGen.
Crude oil today hit a 6-month high as the Euro and Sterling both jumped to fresh 10-month highs vs. the Dollar, capping the gold price for European investors at a 1-day high.
Asian and European stock markets added almost 2% on average. New York stocks opened the day over 1% higher.
"We remain bullish on gold," says UBS chief metals strategist Edel Tully, because of "inflation expectations on the rise, low real interest rates, the fear of currency debasement, resilient physical demand, and limited scrap sales."
The Fed said late Wednesday it hopes to pump $600 billion into the US economy between now and June 2011, buying $75bn of long-dated government Treasury bonds each month and then reviewing the program.
The US central bank also voted to reinvest (and again into T-bonds) the money it's being repaid from earlier mortgage-bond purchases.
"[That means] bringing the total closer to $800bn," notes Walter de Wet at Standard Bank today. "Given the relationship between precious metals and liquidity, we view this as extremely positive for precious metal prices."
The New York Federal Reserve meantime confused bond-market analysts overnight by "temporarily relaxing" the 35% limit imposed on its purchase of any single issue of US government debt, but moving to breach it in what a press release called "only modest increments".
The New York Fed's operational account – where QEII purchases will be held – already owns 30% of T-bonds maturing between 2014 and 2020.
Two-thirds of the Fed's newly created $600bn will be spent on T-bonds maturing between those dates, notes Tracy Alloway at the FT's Alpha blog.
"The economy isn't measuring up, so the Fed is going to change the ruler," said James Grant, editor since 1983 of Grants Interest Rate Observer, to Bloomberg last night.
"They talk about quantitative easing or long-term asset purchasing...No. It is money printing...They intend to make everything seem better with a devalued Dollar."
But "gold has [already] flown up in price," says Gordon Fowler, CIO at Philadelphia-based wealth manager Glenmede, speaking to Reuters this week at the newswire's Wealth Management Summit in New York.
"Inflation would have to go up 90% in this country for [the current gold price] to get back in line."
"That [gold investment] play has already passed by," agrees Lawrence Hughes, chief executive of BNY Mellon Wealth Management.
"Investors need to be careful not to do what people do in line at the grocery store: always jump to the fastest-moving line or, in this case, to the hot-performing category."
Dollar gold prices have risen 25% so far this year. India's BSE stock index has gained 26% for US investors, while the Japanese Yen has risen 36% on the currency market.
By today's new 30-year record-high London Fix, the price of silver had risen by more than 50% from New Year's Eve.
"Investors need to get the money from under the mattress and working again," reckons Robert McCann, chief executive of Swiss bank UBS's American wealth management office, also advising his clients to quit gold and move back to "risk assets", according to Reuters.
New data meantime showed stronger-than-expected new US jobless claims for last week, plus a sharp rise in productivity and a fall in per-person labor costs.
Eurozone factory input prices rose 4.2% year-on-year in Sept., the 16-nation's data agency said, while Germany's services sector expanded for the sixth consecutive month.
The European Central Bank, however – like the Bank of England in London – voted today to keep its interest rates at a record low for the 20th month running.
Over in Moscow on Thursday, the Finance Ministry cut Ireland and Spain from its approved list of countries whose government bonds can be bought and held by Russia's two sovereign wealth funds.
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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