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Gold "Refuses to Fall" as Central Banks Deny Inflation Risk in Low Interest Rates

Commodities / Gold and Silver 2010 Mar 10, 2010 - 08:09 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD continued Tuesday's late rally this morning in London, rising 1.6% from yesterday's 1-month low vs. the Dollar as world stock markets, government bonds and commodities held flat.


A fresh drop in the Pound Sterling – sparked by the worst UK production data since 1991 – pushed the gold price for UK buyers back to £752 an ounce.

Euro gold prices added 1.0% from Tuesday's 7-session low.

"Gold refuses to fall substantially," says Walter de Wet, chief commodities analyst at South Africa's Standard Bank, "but resistance to a move higher is equally great at this stage.

"There is very little due on the macroeconomic front to drive prices today, and the Dollar could dictate direction."

Noting that the "net long" position held by speculative players in US gold futures rose for the third consecutive week on the latest data, the trend in leveraged betting "is once again upwards" says the VM Group consultancy in its Precious Metals Weekly for Fortis Nederlands.

"The general level of optimism concerning gold's prospects" has spread to Tokyo's Tocom futures exchange, the report adds, but "investors there remain cautious."

The gold price in Yen today pushed 2.0% higher from yesterday's dip, more than trebling from 10 years ago when the Bank of Japan first embarked on its zero-rate and quantitative easing program and standing some 6% off late-2009's three-decade highs.

Here in London, "I don't want to be too facetious about it, but if the markets really believed there's a major inflation threat...then you would be seeing interest rates shooting way up and you would be seeing the Pound move a lot more," said Bank of England policy-maker Adam Posen in a TV interview this morning.

Gold has risen by 52% against the Pound in the two years since the Bank began cutting UK interest rates towards their current all-time record low of 0.50%.

The gold price in Sterling has added 16% since a £200 billion program of creating money to buy government debt began this time last year.

"In the medium term, monetary policy must become more restrictive. However, it's too soon for that," said Swiss National Bank vice-chairman Thomas Jordan yesterday.

Thursday's SNB policy decision will leave Switzerland's interest rates at 0.25% and commit the Bank to fresh currency-market intervention – creating Francs to sell against the Euro – according to every analyst surveyed for a Reuters poll today.

Gold priced in Swiss Francs, once considered the world's most stable "safe haven" currency, last week touched new record highs at CHF39,450 per kilo.

That's almost three times the price of May 2000, when the Swiss public voted to cut the Franc's 40% gold bullion backing, enabling Switzerland's central bank to begin selling 1500 tonnes of metal from its reserves.

"Buy gold," said Franco-Nevada chairman Pierre Lassonde in response to a question from MineWeb's Dorothy Kosich at the Prospectors and Developers Association of Canada on Tuesday.

"You may be on the verge of some serious price increase here," said the former president of world No.2 gold mining producer Newmont, as mining companies face problems in controlling costs.

The global economic downturn "has not affected capital costs" as much as miners may have hoped he said, while most large-cap gold mining stocks have barely moved since 2004.

Looking at prospects for future world mine output, "We have been using, more or less, the same technology for the last 100 years," Lassonde added.

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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