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Gold Bullish on Real Interest Rates Outlook

Commodities / Gold & Silver 2009 Mar 26, 2009 - 11:17 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE of gold rose further on Thursday in London, recovering one-half of this week's $35 drop to hold above yesterday's sharp jump to $938 an ounce.

US stock markets opened the day higher, but European shares were flat, while commodity prices rose nearly 1% on average, led by crude oil.

Government bond yields remained unchanged as the US Treasury auctioned the third chunk of this week's new $98bn in government debt.

Yesterday the Federal Reserve bought $7.5bn of Treasury bonds on the open market – its first such purchase in more than 45 years – in a bid to depress longer-term interest rates.

"Should real interest rates [adjusted for inflation] move lower or buying by Gold ETFs continue at its current torrid pace," says a note from analysts at Goldman Sachs, "the upside risk to Gold Prices would be significant."

"Lower long-term real interest rates are bullish for gold," agrees Manqoba Madinane for Standard Bank in Johannesburg this morning.

"The heightened uncertainty regarding the role of the US Dollar could [also] support gold – and precious metals in general – despite scrap gold flooding the market."

This morning the Russian first-deputy foreign minister Andrei Denisov called for an international conference to discuss "the idea of a new global accounting unit or a new global currency", stoking the debate sparked when Chinese policy-chief Zhou Xiaochuan proposed a "super-sovereign reserve currency" on Monday.

Zhou's comments forced a sharp 3-minute plunge in the US Dollar on Wednesday, after Treasury secretary Tim Geithner appeared to welcome – but then refuted – a review of how the world's international currency system works.

"The Dollar remains the world's dominant reserve currency," Geithner said in a live New York interview with the Council on Foreign Relations, reversing an earlier comment that he was "quite open" to using Special Drawing Rights instead.

The notional SDR currency unit – created and held by the International Monetary Fund (IMF) and tracking a basket of major currency values – has lost two-thirds of its value against gold in the last 10 years.

Today the price of gold in Euros touched a 3-session high of €694.50 an ounce, up more than 19% from this time last year.

For Japanese investors now Ready to Buy Gold , the price traded 1.2% higher today, recovering over two-thirds of last fall's 40% drop, which started from quarter-century highs above ¥3,300 per gram.

Here in London, and as the Sterling gold price rose to £648 an ounce, an auction of inflation-linked UK government gilts drew bids for almost three times the debt on offer.

That contrasted sharply with Wednesday's 0.93 cover for an auction of conventional gilts.

San Francisco Fed president Janet Yellen said overnight she wants power for the US central bank to issue its own debt – selling bonds and thus removing cash from the economy to "sterilize" its current money injections – once the financial crisis recedes.

Ahead of next week's much-anticipated interest-rate decision from the European Central Bank, meantime, the ECB said new credit growth collapsed to 0.5% per year for private households in Feb.

Overall, the Euro currency zone's broad M3 money supply grew by 5.9%, beating analyst forecasts of 5.5% but lagging UK growth of 19.9% and US money-supply growth of 10.1% – itself more than twice the average annualized rate of the last 20 years.

Yesterday Norway's Norges Bank cut its key lending rate to 2.0% and said it may halve that rate again by 2010.

Today, the Reserve Bank of New Zealand denied rumors of an emergency rate-cut.

By Adrian Ash

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 , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

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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