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Gold Set to Break Higher as UK Inflation Jumps

Commodities / Gold and Silver 2010 Jan 19, 2010 - 12:05 PM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD slipped against the US and UK currencies on Tuesday but rose to a one-week high for Euro investors as the single currency fell on a series of poor data.

Construction output in the 16-nation Eurozone shrank 8% in Nov. from the same month in 2008, new figures showed. Economic sentiment in Germany also fell on the ZEW survey.


Consumer-price inflation here in the UK meantime jumped at a record pace during Dec., nearing the 3.0% level at which the Bank of England must publicly defend its policies.

Bank interest rates for UK savers have now lagged inflation since June 2008.

"We see growing resistance to a move lower [in gold]," says today's Commodities Daily from South Africa's Standard Bank, "and continue to see good physical demand."

Advising precious metals traders to buy platinum and palladium "on dips" as the new US exchange-traded funds draw strong investment flows, "When the break comes [in gold] it will be on the upside," writes chief analyst Walter de Wet.

Meantime, "We expect gold to remain range-bound until there is a greater sense of direction to financial markets."

"Based on current rates of investment and on historical analysis of other products, we expect that within the next couple of years the US platinum ETF will more than exceed UK and Swiss platinum ETF holdings," forecasts London's Virtual Metals consultancy  in its latest Precious Metals Investment Weekly for Fortis Nederland.

Gold trust-fund holdings, in contrast, "are now at their lowest since October 2009, and, interestingly, have been absent from the gold price rally since early December 2009."

Overall last week, a strong rise in bullish gold futures and options positions negated a drop in gold ETF holdings, Virtual Metals says.

Bullish speculative and exchange-traded silver investment rose 3%. Platinum investment outside the new US exchange-traded funds held flat.

"The impact of economic slack on [consumer] price trends has been swamped by Sterling's 27% fall between July 2007 and March 2009," notes Simon Ward of Henderson Global Investors of today's UK data – "a plunge actively promoted by Bank of England policy-makers."

Gilt yields jumped as the price of UK government bonds fell on Tuesday, pushing the return offered by 10-year debt to 4.03%.

It hit a 13-month peak last week of 4.12%.

Royal Bank of Scotland strategists warned meanwhile that no solution to Greece's huge budget deficit "appears good for the Euro."

Should Germany and France come to its aid, that "sends a bad message to other member states." Letting Greece exit the union, on the other hand, would trigger a "massive risk of default [and see] its relevance as a reserve currency...diminish."

The single currency dropped more than 1¢ vs. the Dollar this morning to reach a near 3-week low, helping the gold price push above €794 an ounce.

Broad commodity prices also fell – and crude oil slipped below $78 per barrel – despite news that world No.2 sugar exporter the Philippines may see its output drop on poor rainfall.

Pakistan's wheat output is also likely to fall, a commissioner in Islamabad warned, after below-average rainfall in late 2009 led farmers to plant fewer acres.

European shares reversed early losses as US stocks opened higher today.

The Western world's largest bank, Citigroup, said that repaying Washington's emergency TARP aid led to a $7.6 billion loss during the last 3 months of '09.

"All federal debt, including unfunded liabilities, isn't 100% of GDP but 600%," says Swiss fund manager Felix Zulauf of the eponymous asset management firm, speaking at the latest Barron's magazine roundtable.

"Eventually the US will arrive at a point where interest payments on government debt all of a sudden go to 20%, 25%, 30% of tax revenue. And once you go above 30% you are done. You go into default or your currency breaks down and your system collapses."

Advising investors to defend themselves by buying gold, "The gold market is very small," says Zulauf. "The annual supply of gold is probably $80 billion. Bonds are a few trillion. At some point, gold could have a quantum leap."

In China, meanwhile, "We will maintain reasonable growth in money supply and credit, focus on optimizing the credit structure and carefully manage the pace of lending to reduce financial risks," said prime minister Wen Jiabao in a statement on Tuesday after the central bank raised money-market interest rates for the second week running.

Taiwanese overnight lending rates also rose, creeping up 0.01% to an 8-month high.

Private individuals in mainland China – now the world's heaviest buyers of physical gold – will not be allowed to invest in the Hong Kong stock market, officials confirmed today, blocking a proposal that saw the Hang Send index gain 55% in anticipation when it was first put forward in 2007.

By Adrian Ash
BullionVault.com

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

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.


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