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Gold Holds Tight as Fed Buys U.S. Treasuries

Commodities / Gold & Silver 2009 May 18, 2009 - 08:45 AM GMT

By: Adrian_Ash


THE PRICE OF WHOLESALE GOLD BULLION held inside a tight $5 range early Monday, bouncing off $927.60 an ounce as government bonds rose, pushing interest rates lower, and crude oil rose back above $57 per barrel.

World stock markets held flat overall, as sharp losses in Tokyo were followed by a record surge in the Mumbai Sensex – up 17% after a decisive election victory by the ruling Congress Party.

The Indian Rupee also rose on the news, up 2% against the strengthening Dollar and knocking the Gold Price in Rupees down 2.6% to 14,650 Rupees per 10 grams in the world's hungriest physical market.

"Since January 2009, we have seen net buying whenever the Gold Price moved below $900, and net selling whenever it moved above $900," says today's Precious Metals Insight from Walter de Wet at Standard Bank in London.

"However, since the beginning of May, when the Gold Price moved above $900 again, net physical buying has continued. While we have too few data points to call this a sustainable trend yet, we view this as bullish for gold."

Brazilian president Luiz Inacio "Lula" da Silva meantime travels to China this week, and "the outcome could be quite explosive," says Steven Barrow, also at Standard Bank.

Having blamed the global financial crisis on "blue-eyed bankers" at this April's G20 summit, "Lula has already said that he will suggest to China’s leaders that bilateral trade is conducted in local currencies, not the US Dollar," Barrow notes.

"There’s no reason why China can’t make such a commitment this week."

Bilateral trade between China and Brazil accounts for only a tiny portion of global trade, but "these sorts of actions from Brazil and China could be the start of creeping de-dollarisation of trade and that’s something that could weigh on the dollar in the very long haul," says Barrow – "meaning years, if not decades."

Latest data showed on Friday that the US current account deficit was well-financed in March, with foreign investors buying a net $23.2 billion of US securities, compared with a net outflow of $91.1bn in Feb.

Foreign central banks acquired $29bn of US Treasury debt, up from Feb's $2.0bn total. Private foreign investment flows into US government debt were steady at $26.7bn net.

This week the Federal Reserve will buy Treasury bonds with 5- to 10-year maturities, according to an inter-dealer broker in London, quoted by Bloomberg. After 10-year yields ticked back above 3.0% in April, however, "The bear market in Treasuries is underway," reckon Richard Berner and David Greenlaw, senior strategiests at Morgan Stanley, "[but] bear market rallies seem likely in the next few months.

"Real rates are historically at very low levels," they note, pointing to the Fed's $300bn Treasury-bond pledge, worth one-third of this fiscal year's new supply.

"Moreover, the market is well aware of the fact that the Fed can always increase the size and lengthen the duration of the Treasury purchase program," as it did with mortgage-backed securities and agency debt.

"Another reason that real rates are low is the dearth of competition from private credit demands that typifies recession."

Today the Dollar capped the Euro below $1.35, the 5-week high hit last Monday. The US currency also strengthened vs. the Japanese Yen, adding 1.4% to touch ¥95.80 – one-third beneath its record peak of a decade ago, but one-tenth above Jan. 09's thirteen-year low.

Last week the Dollar closed just shy of 83 on its trade-weighted index – up by 17% from March 2008's record low but 7% below late-Feb's two-year highs – as measured against the other six major world currencies (the Euro, Canadian Dollar, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, and Swedish Krona).

When the Dollar Index fell through 83 in Nov. 2004, the Gold Price traded at $440 an ounce. Gold reached $600 by June 2006 and had moved up to $760 an ounce by autumn 2008, the next two occasions when the Dollar Index traded at today's level.

"Gold Prices can't rise indefinitely," reckons Herve Lievore, investment strategist at AXA Investment Managers in London, speaking this weekend to The Independent.

While "Investor demand for gold is strong, fuelled recently by the fear of a systemic crisis and now by the growing concern on inflation," he says, "high prices boost supply and kill demand, as was perfectly illustrated by oil last year."

Crude oil continues to trade two-thirds below its Dollar peak of mid-2008. The Gold Price in Dollars, in contrast, stands 10% below its record top.

For Sterling, Euro, Canadian and Swiss investors now Ready to Buy Gold, the price today held 13% below this spring's all-time highs.

"In the year to date, gold has underperformed other commodities," says Lievore. "That reinforces the attractiveness of the yellow metal in an environment with many uncertainties. But don't expect a 150% increase like in the last five years."

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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