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Gold Rises as Central Bankers Choose Inflation Solution

Commodities / Gold & Silver Dec 12, 2008 - 07:41 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF WHOLESALE GOLD held inside a tight $10 range early in London on Friday, nearing the week-end almost 8% above last week's close for US investors.

World stock markets sank, meantime, losing 5.5% in Tokyo and dropping 5% in Paris, after the US Senate killed a $14 billion bail-out of America's "Big Three" auto-makers.


"I dread looking at Wall Street," said Harry Reid, Democrat leader in the Senate.

"It's not going to be a pleasant sight."

Crude oil dropped more than 5% from yesterday's sharp rally, despite rumors of Opec acting to slash output quotas. News of the auto-rescue's death also sent the price of platinum tumbling below Gold Prices for the first time since late 1995.

Some 60% of annual world platinum supplies are used in auto-catalyst production (Johnson Matthey statistics). Its price has now sunk to a 53-month low, dropping by two-thirds from the record highs of Feb. this year.

"It could become familiar to see the Gold Price trading at a premium to platinum," says Mitsui, the precious metals dealer, today.

"Even if the bail-out had been approved," says Walter de Wet at Standard Bank in South Africa – the world's No.1 platinum mining nation – "we believe platinum demand will remain under pressure.

"Who will buy the cars? With the US consumer under pressure, we do not yet foresee a turnaround in sales."

Data from the Federal Reserve late Thursday showed US households paying down debt for the first time in six decades.

Up to 30% of the bulk cargo ships booked for 2009 delivery could be cancelled, reckons Martin Strothmann – head of German ship financiers Ideenkapital Marine Finance – due to the collapse in world trade.

"Shipowners are cancelling orders on a massive scale where this is legally possible," he told a Hamburg conference on Thursday, quoted by Reuters.

At the London Metal Exchange on Friday, base metal contracts sold sharply lower on what Goldman Sachs calls "substantial surpluses" for 2009.

Unlike industrial metals such as copper and platinum, in contrast, the monetary metal of Gold Bullion "is serving its purpose as a hedge of wealth in uncertain times," notes a report from the Canadian mining team at PricewaterhouseCoopers.

The consultancy's latest Gold Mining survey also forecasts a near-4% drop in global output for 2008. World gold mining output peaked in 2003, back when the gold price stood at just one-half of today's level.

Over on the currency markets Friday, the British Pound clung onto one-half of yesterday's 5¢ bounce against the Dollar, capping the Gold Price in Sterling below £547 an ounce – some 2% beneath Thursday morning's New Record Gold Price for UK Investors.

The European single currency meantime held 5% above last Friday's close vs. the Dollar, trading at $1.3330 and curbing the week-on-week gains in gold for French, German and Italian investors at 2.7%.

British gold buyers are 6.2% better off. Gold rose 5.3% this week vs. both the Canadian and Australian Dollars.

Meantime in the debt markets, government bond prices rose, pushing the yields offered to new buyers lower still – especially on short-dated Treasuries – despite fresh warnings of Quantitative Easing worldwide.

Printing money to buy government, business and banking debt, central banks Thomas Jordan, a board member of the SNB, said the bank was mulling extreme measures to stabilise the financial system and cushion the economy as it falls into recession next year.

"We could engage in quantitative easing and we could intervene in foreign exchange markets," says Thomas Jordan – a member of the Swiss National Bank, which yesterday slashed its key interest rate to just 0.5%.

"Or we could buy up bonds and try to influence long-term interest rates. All these options are open and we're not limited in any way in choosing from among these instruments."

Printing money in a bid to support asset prices and stoke fresh borrowing, "What they are saying is that inflation is no longer a problem, it's the solution," notes David Bloom, chief currency trader at HSBC bank in London.

"The SNB are the hard men of central banking; they are even harder than European Central Bank. [But] they want stimulus any way they can get it."

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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