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Gold Touches New Rally High as U.S. Dollar Falls

Commodities / Gold & Silver 2009 May 12, 2009 - 07:13 AM GMT

By: Adrian_Ash

Commodities

THE GOLD PRICE rose sharply for US investors in London on Tuesday morning, touching $922.50 an ounce as world stock markets held flat and the Dollar fell hard on the currency markets.

The Euro hit its best level in 8 weeks near $1.37, while US crude oil broke fresh 6-month highs above $59 per barrel.


Government bond prices retreated from Monday's bounce, pushing 10-year US Treasury yields back up to 3.20%.

"It is too early to expect an economic recovery and we see [the 40% gain in world equities since March] as a bear market rally only," says the May edition of Metal Matters from London market-makers Scotia Mocatta.

"When this peters out, stress levels will rise again as will demand for safe haven investments. In addition, with central banks around the world engaging in Quantitative Easing, we expect inflation concerns and further worries about financial stability, to pick up again.

"There is still potential for a mass of retail Gold Buying if the fear factor appears again, which we think it will."

Fellow London dealers Mitsui also declare themselves today as "fully paid up members of the club that believes in gold's role as an inflation hedge."

But "Inflationary concerns are some time away just yet," cautions Edel Tully in Mitsui's latest Gold Investment note, "and in the short term there are few drivers that we feel will push gold significantly higher. In the short term we’re cautious."

On the economic front today, UK news proved less bad than expected – even with industrial production down 14% from March last year and the trade deficit holding at £2.5 billion ($3.8bn) – helping to drive a jump in the Pound to its best levels so far in 2009 above $1.53.

That capped the Gold Price in Sterling near a four-session low of £600.50 an ounce.

"As far as growth is concerned, we're around the inflection point in the cycle, that's the sentiment," said European Central Bank chief Jean-Claude Trichet in a speech on Monday.

"In all cases we see a slowing down of the decrease in GDP," said the ECB president. "In certain cases you see already a picking up."

Italy's industrial output fell by 4.6% month-on-month in March. French production dropped 1.4%.

China, the world's No.1 importer of iron ore, set a fresh record in April for monthly purchases, up by one third from the same time in 2008.

But despite a surge in fixed-investment at factories and new property – up by 30% during the first four months of '09 – China's exports meantime sank yet again in April, down by more than one-fifth from a year earlier and the sixth monthly decline running.

"I think the issue at hand is whether or not the Dollar will retain its value, and I think it will," said US Federal Reserve chairman Ben Bernanke at a conference hosted by the Atlanta Fed late Monday.

"I think the Dollar will be strong because the US economy is strong. And it will also be strong because the Federal Reserve is committed to assuring that we have price stability."

Since Dr.Bernanke became Fed chairman in Feb. 2006, volatility in US consumer-price inflation has more than doubled from its previous five-decade average, jumping to a 61-year high in March of this year.

The Gold Price in Dollars has risen by 68%.

"Our largest financial institutions have been evaluated in a comprehensive and rigorous fashion," Dr.Bernanke went on in his speech from Jekyll Island, where the Fed was founded by a secretive meeting of top private bankers in 1913, pointing to last week's "stress tests" of the top 19 banks in America.

"The banks will, as a consequence, be required to have a capital buffer adequate to weather future losses and to supply needed credit to our economy – even if the economic downturn is more severe than is currently anticipated."

Bank of America yesterday raised $7.3bn after selling 6% of its China Construction Bank to mostly mainland China investors.

Today the Associated Press reported that Citigroup Inc. – the largest recipient of tax-funded banking aid – is using all of the $45 billion it's received to make new loans.

Both Citi and General Motors could be ejected however from the Dow Jones Industrial Average, after GM's chief executive officer Fritz Henderson said its bankruptcy is now "more probable" and the banking giant continued to need huge quantities of government capital.

"The chain of events involving GM and Citi seem to be marching in a certain direction," according to John Prestbo, chairman of DJI oversight committee that decides on the 30 constituent stocks.

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 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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