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Gold Firm on Inflation Investment Hedge

Commodities / Gold & Silver May 21, 2008 - 10:15 AM GMT

By: Adrian_Ash

Commodities GOLD BULLION for physical delivery rose to a fresh one-month high early in London on Wednesday, breaking above $927 per ounce as crude oil topped $130 per barrel and the US Dollar fell yet again on the currency markets.


Tracing the link between Oil & Gold , "the resilience in oil prices must be re-setting higher global inflation concerns," reckons Mark Pervan, an analyst at the Australia & New Zealand Banking Group, "which should trigger a catch-up rally in Gold ."

"The US Dollar also appears to have taken a short-term turn for the worse, which should buoy gold as a currency hedge."

But alongside the creeping loss of purchasing power in US Dollars – both for fuel and other imports – global investors are also choosing to Buy Gold as a hedge against the broader financial markets.

Yesterday in New York, the world's biggest insurer by assets, AIG, said it wants to raise $20 billion to support its balance sheet – some 60% more than its last estimate.

In the tradable debt markets today, the Moody's ratings agency stripped AAA status from the government of Iceland.

After the Dow Jones closed New York down 1.5% last night, stock markets in Asia dropped 1.1% on average on Wednesday.

European equities then fell at the opening – even as UK and German bond prices slid – led lower by auto-makers.

By lunchtime in Frankfurt the German Dax added another 88 points to Tuesday's 107-point loss.

That took the Dax's losses to 2.7% in less than two days, despite a surprise up-turn in Germany business confidence reported by the Ifo institute.

"The growth slowdown [in Europe] would have to be pretty pronounced to affect interest-rate setting," says Kai Wildfoerster of Pimco. "The European Central Bank remains focused on inflation."

The European single currency's interest-rate advantage over the US Dollar now stands at 2% per year. Traders today pushed it to a new one-month high of $1.5770 on the currency markets after the Mortgage Bankers Association reported a 7.8% drop in US home-loan applications for last week.

The Gold Price in Euros also rose, however, reaching a new five-week high of €588 per ounce.

Back in the oil market, long-dated oil futures also continued to push sharply higher, rising from yesterday's $139 record for 2016 contracts and "indicating that investors could be expecting indefinite supply-side problems," as Standard Bank notes in its Gold Market report today.

"You see more money going into the back end of the curve," agreed a Swiss oil trader to Bloomberg this morning.

"The issue is not the fundamentals. What's bullish is the comments from people like Goldman Sachs [now forecasting $200] and Boone Pickens [now targeting $146 per barrel for next-month delivery]."

Today in India – the world's hungriest market for physical Gold , especially jewelry – prices rose above 12,500 Rupees per 10 grams as the Indian currency slipped in value.

For British investors looking to Buy Gold the price broke above £471 per ounce for the first time since 18th April as the British Pound fell back from a fortnight's high vs. the Dollar on the currency markets.

The Bank of England's latest summary of UK business conditions confirms the gloomy outlook made by policy-makers at this month's interest-rate meeting. "Labour demand [has] softened noticeably," the Old Lady reports today, "with a marked fall in employment intentions in the services sector."

"Mortgage approvals for house purchase had dropped to a series low of 64,000 in March," the Monetary Policy Committee noted at its meeting on May 7/8th, "50% lower than the peak in November 2006.

"There had also been a particularly marked fall in the Home Builders Federation survey balance of net reservations. Growth in mortgage lending was likely to slow further, as banks had not reached the end of their balance sheet adjustment."

But the record slowdown in mortgage approvals has failed to stem credit growth in the United Kingdom, which expanded by 14.4% in April from one year before.

May marked the 62nd consecutive month of double-digit growth in new UK lending.

"Few empirical regularities in economics are so well documented as the co-movement of Money Supply and Inflation ," as Mervyn King, now governor at the Bank of England in London, noted in a speech of late 2001.

Right now, the world's supply of money is surging, even as "deflation" hits global real estate, credit derivative and stock market values.

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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