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Gold Up as World Policy-Makers Pile Mistake on Mistake and Push Inflation Higher

Commodities / Gold & Silver Jun 30, 2008 - 08:57 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD BULLION jumped again early Monday, just breaking the May 21st high of $935 per ounce to touch an 11-week high.

Crude oil rose to a new record above $143 per barrel, and bond yields ticked higher as prices fell.


World stock markets fell slightly overall, dropping for the eighth session in ten.

"The recent rise in the Gold Market shows that uncertainty and fears still exist out there," notes Bill O'Neill of commodity analysts Logic Advisors in New Jersey . "The inflation concern due to the lack of a definite Fed statement [last week] was a big plus for the metal."

Ahead of this Thursday's interest-rate decision from the European Central Bank (ECB), the Euro rose to a three-week high vs. the US Dollar above $1.58 this morning.

Key ECB members have repeatedly hinted that they'll raise Eurozone interest rates 0.25% to a seven-year high of 4.25% at this week's meeting.

But Tuesday brings German retail sales and unemployment data, both expected to show a slowing economy. Wednesday will then see May's inflation numbers for European manufacturers, last pegged at the fastest rate since summer 1984.

"Rising oil prices could also raise global stagflation concerns," says Manqoba Madinane for Standard Bank in Johannesburg , "which should keep major equity markets under pressure.

Noting that the cost of insuring corporate bonds against default has risen sharply – "signaling increased financial market systemic risk" – Madinane adds that "equity market risk aversion should further support commodity investment sentiment. These factors could provide upside potential for precious metals today."

The threat of higher interest rates plus slower growth helped knock the German Dax in Frankfurt lower again early Monday, pushing equity prices more than 10% down from the end of May.

Sydney 's All Ordinaries index closed the first-half of 2008 – the official end to Australia 's financial year – down some 17%, its worst showing in nearly three decades.

On Wall Street, the Dow Jones index has lost more than 10% so far this month. And over in emerging Asia , "several countries are looking at spending billions of dollars on shares to support plunging stock markets," reports the Financial Times today.

The Taiwanese stock index fell to a five-month low on Friday. Pakistan 's benchmark Karachi index has lost 13% since the start of January. The Hanoi stock market in Vietnam has dropped two-thirds of its value so far in 2008.

Local media reports a series of meetings to establish so-called "stabilization" funds, financed by the huge foreign currency reserves built up in Asia as the US Trade Deficit swelled over the last decade.

"Today, the big challenge is how to control inflation, which is the biggest problem that most countries are now facing," said José de Gregorio, head of Chile 's central bank, at this weekend's BIS summit of world finance leaders in Basel , Switzerland .

Heard by ECB chief Jean-Claude Trichet and US Fed chairman Ben Bernanke, the head of the Bank for International Settlements, Malcolm Knight, then warned that "there are clear signs that inflation is resurgent worldwide.

"Central banks need to be particularly vigilant to keep inflation expectations under control."

But rather than advocating tough monetary policies to restore consumer and business confidence in the value of money, the BIS attendees chose instead to blame high oil and food prices for the surge in world inflation rates.

Some 29 countries worldwide have now curbed or banned exports of key foodstuffs, the New York Times notes today, in a bid to guarantee domestic supplies at affordable prices.

But "it's obvious that these export restrictions fuel the fire of price increases," says Pascal Lamy, director-general of the World Trade Organization.

Fourteen Asian states, including India and China , have now limited or banned exports of rice. But rice prices rose by 140% between Jan. and May.

Wheat exports have been curbed by 15 nations, including Pakistan . Domestic wheat prices have surged regardless, according to the Daily Times .

"People are in a panic, so they are buying more and more — at least, those who have money are buying," the NY Times quotes a rice dealer in Los Baños in the Philippines .

She's now selling 8,000 pounds of rice per day compared with 5,500 pounds this time last year.

Meantime in the American energy market, where US politicians just approved a measure to restrict so-called "speculation" by investment funds, the volume of open contracts in crude oil fell to a 15-month low in the week to last Tuesday.

New data from the Nymex exchange also showed "small speculators" – meaning private investors and smaller funds – cutting their bullish bets on the oil price by almost one-fifth after US legislators "put oil speculators on notice" in the words of House Speaker, Nancy Pelosi.

The total number of contracts in US gold market futures, in contrast, rose almost 3% meanwhile. Large investment funds grew their "long" position in Gold for the first time in more than a month.

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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