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Gold Bounces on US Wholesale Inflation Hitting 26 Year Highs

Commodities / Gold & Silver Feb 26, 2008 - 11:24 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES bounced from a four-session low at the London opening on Tuesday, recovering two-thirds of the week's 2.8% losses to date on news that producer-price inflation for US industry rose last month at a 26-year record clip.

Wholesale prices increased 1% in Jan. said the Labor Dept. just ahead of the Wall Street open, twice the pace expected by private economists. Now running at 7.4% year-on-year, wholesale price inflation was last seen at these levels in the fall of 1981.


Before the Fed began slashing its interest rates to bail out the financial sector in August, wholesale price inflation was running at 2.3% year-on-year, as Briefing.com reports.

But despite the Fed's best efforts, "wherever you look [in the US housing market] things look bleak," says Robert Shiller, professor of economics at Yale University and head of MacroMarkets. His consultancy today reported a 9.8% drop in real estate prices across the top 10 metropolitan US regions during 2007 as a whole.

Seventeen of the broader Case-Shiller index's 20 metro areas showed an annual decline. The year-on-year slide outpaced the 1990-91 real estate slump more than three times over.

Now Bloomberg warns that so-called "variable interest entities" (VIEs) may be closed, forcing the world's biggest investment banks to take yet more non-performing credit investments back onto their balancesheets, as the big monoline bond insurers refuse to underwrite new issues of mortgage-bond debt.

Analysts at Oppenheimer & Co. in New York say further downgrades to the bond insurers' own ratings could knock $70 billion off the banks' balancesheets, even before the VIEs are taken back.

"The disclosure on VIEs is hopeless," says Tanya Azarchs, head of financial institutions at Standard & Poor's, the ratings agency. "You have no idea of the structure or how that structure works. It's like every day you come into the office and another alphabet soup has run off the rails."

The largest monoline, MBIA, yesterday closed its doors to new asset-backed business for six months yesterday, leaving mortgage lenders and their bankers to rely solely on the credit-quality of new mortgage for any potential sale to third-party investors such as pension, insurance, mutual or municipal funds.

"We see this as a short-term correction," said Walter de Wet of Standard Bank in Johannesburg, South Africa, of the Gold Market's early dip this morning. Citing the threat of gold sales from the International Monetary Fund (IMF), a "further near-term correction can be expected when the official date is announced [but] lower price levels should rejuvenate physical demand."

The $26 drop in Gold Prices from yesterday morning's near-record $952 per ounce came after David McCormick, the US Treasury's undersecretary for international affairs said "we have some confidence that there will be some support [in Congress]" for the IMF gold sales proposed by leaders of the G-7 industrialized nations in Tokyo earlier this month.

The United States retains a casting vote in IMF gold activity, but any decision on gold sales made as part of broader structural reforms to cover the Fund's $400 million annual deficit may meet opposition from European states.

Today in Burkina Faso Dominique Strauss-Kahn, president of 165-member IMF – the world's third-largest gold hoarder behind the US Fed and German Bundesbank – said extra voting powers for emerging countries such as China, India, Brazil could face a challenge "because the sum [of IMF voting rights] has to add up to 100%, so some others must lose."

Any sales may also become part of the annual Central Bank Gold Agreement, which caps the amount of Gold Bullion sold by member states each year.

"It is a material development and suggests that it could actually get through [Congress]," reckons Stephen Briggs, economist at SocGen Corporate & Investment Banking in London. "That's a genuine change because the Gold Market was assuming otherwise.

"Gold was already overdue a correction after this run and this [was] a good enough excuse." ( Get the full story on IMF Gold Sales here... )

In the broader commodities market today, crude oil held steady above $98.50 per barrel, and copper reversed Monday's dip. Cocoa prices reached their highest level since 2003, while coffee slipped from yesterday's new all-time highs.

Coffee has climbed by 35% since New Year's Day so far in 2008. Sugar price, already 20% higher according to Bloombger data, continued to rise in London today.

Yesterday Kazakhstan said it may become the third major wheat exporter to impose new tariffs on the grain, pushing world prices sharply higher. The move follows the imposition of wheat export tariffs by Russia and Argentina, who also blamed surging domestic inflation for their decisions.

Global wheat stocks have now shrunk to a three-decade low. ( But surely Recession Kills Inflation , right? Find out now... )

In the UK economy, meantime, the latest "distributive trade survey" from the Confederation of British Industry (CBI) also shows a sharp increase in High Street prices, matched by a sharp decline in total consumer spending.

The number of retailers reporting growth in Feb.'s turnover was outweighed by retailers suffering a decline in sales. But the net balance of retailers reporting higher prices, in contrast, rose to a 11-and-half year record.

For every one business which cut its prices, almost 10 businesses raised them.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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 2008

Please Note: This article is 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.

Adrian Ash Archive

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