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U.S. Interest Rate Cuts to Drive Gold Bull Market During 2009

Commodities / Gold & Silver Dec 16, 2008 - 07:55 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF WHOLESALE GOLD slipped lower early in London on Tuesday, recording the best Gold Fix in two months at $833.50 an ounce but trading 1% below Monday's top in the spot market.

Tokyo stocks ended the day 1% down, while London shares held flat. The US Dollar regained one of yesterday's four-cent losses vs. the Euro.


The Gold Price in Euros held near €608 an ounce.

"We finally saw Gold break out to the upside Monday," says a note from the precious metals team at Mitsui in London. "Stops at $829 were triggered leading to a $10 spike – this level is now acting as the support.

"Silver pushed up through $10.50 but there was no follow through to $11."

Today brings the Federal Reserve's final interest-rate decision of 2008, and the "75 basis points cut which the futures market is now pricing with a probability of 68% should be welcomed by equity markets," says Walter de Wet at South Africa's Standard Bank.

"It should also support precious metals and Gold in particular."

Set to keep the rate of interest-after-inflation below zero for the 12th month running – the longest unbroken stretch of negative real rates since 1975 – the Fed's decision will be preceded by the latest US consumer price inflation data, expected to show a sharp decline thanks to both strength in the Dollar and the decline in oil prices throughout November.

Crude oil today rose back above $45 per barrel after gaining – and then dumping – more than 10% on promises of "big cuts" to output quotas when the Opec oil cartel meets in Algeria tomorrow.

Here in the UK, consumer price inflation fell sharply last month, the official data agency said this morning, down for the second month – but ahead of analyst forecasts – to 4.1% annually.

More than twice the government's target, the news required a fresh letter of apology from Mervyn King, head of the Bank of England, to the UK chancellor. Even so, "the November inflation figures are another step along the path...to the first bout of deflation in the UK economy for almost half a century," reckons Jonathan Loynes at the Capital Economics consultancy.

"Retail price inflation is likely to turn negative as soon as the end of Q1 next year," agrees George Buckley at Deutsche Bank in London, "bottoming out as low as -4% in the autumn."

But the collapse of raw materials priced in Dollars since July has been undone for UK consumers by the sharp fall in Sterling – now down by 25% vs. the US currency.

Food and non-alcoholic drinks for UK consumers rose 11% year-on-year in Nov. Housing and home utilities (water, gas, electricity) rose nearly 15%.

Even stripping out these "volatile" food and fuel prices, so-called "core inflation" also rose, reaching a series record of 2.8% year-on-year. The cost of services – provided domestically within the UK – rose at a near-record clip of 4.5%.

Meantime in China, "Consumer prices are going down and sometimes even faster than we think," said Zhou Xiaochuan, governor of the People's Bank, at a forum in Hong Kong this morning.

Warning that China's double-digit rate growth is cooling quickly, "the beginning of next year is full of interest-rate-cut pressure," he added.

Slashing the 2009 forecast for Chinese growth in half to just 5% yesterday, Dominique Strauss-Kahn – head of the International Monetary Fund (IMF) – told an audience in Madrid that without huge stimulus spending by major governments "it will be difficult to avoid a long-lasting crisis that everyone wants to avoid.

"If we are not able to [get $1.2 trillion, some 2% of global GDP], then social unrest may happen in many countries – including advanced economies."

Over on the forex market today, both the British Pound and the European single currency slipped back from new two-month highs against the Dollar on news of record low activity amongst both service and manufacturing firms.

New car sales sank almost 26% year-on-year in Nov., the ACEA trade body added, the seventh monthly decline on the trot.

"The Eurozone recession is clearly gathering momentum," says Martin Van Vliet at ING bank, "and the trough in economic activity is nowhere in sight."

Back in the Gold Bullion market, meantime, "There's a bit of profit-taking but overall gold is holding up pretty well and looking to be the best-performing metal of the year," said Jonathan Barratt, head of Commodity Broking Services in Sydney, Australia, to Bloomberg today.

"Volatility remains high for Gold as the market nears the end of the year," agrees Hussein Allidina at Morgan Stanley in New York. "[But] we expect gold to perform well in 2009, while silver will remain contained by weak industrial demand."

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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