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Gold Says "Cash is Cheap" as Policy-Makers Apply "Quick-Fix Stimulus" Once Again

Commodities / Gold & Silver 2009 Oct 08, 2009 - 09:51 AM GMT

By: Adrian_Ash


THE PRICE OF GOLD rose yet again in Asia and London on Thursday, hitting fresh all-time Dollar highs for the third day running in what one dealer called a "relentless [move] as fresh investment money continues to flood into the bullion market."

Yesterday saw a near-1% rise in the volume of gold held by New York's SPDR Gold Trust, the world's largest gold ETF.

Open interest in US gold futures leapt by 6% from Tuesday.

"Arguably gold's biggest role is as a sentiment barometer," says the BBC. "A high gold price is an indicator that all is not well with the global economy."

"Financial markets are again ignoring tough fundamentals," writes Stephen Roach, chairman of Morgan Stanley Asia, in the Financial Times – "the same dubious script the world followed in the aftermath of the bursting of the equity bubble in the early part of this decade.

"Look how that ended."

Thursday's AM Gold Fix – set as a clearing and reference price by London's largest market makers – came in at $1054.75 an ounce.

It also marked the longest-run of London Fixes above $1000 an ounce, averaging $1026 since last Friday lunchtime.

"With a global recovery unlikely to be smooth," says Investec portfolio manager Daniel Sacks in the Daily Telegraph, "the two main risks to most asset values are inflation and US Dollar weakness– both of which are decisively gold positive.

"Seasonal factors will [also] act as a booster...Safe-haven buying will continue to reinforce the gold price."

"Most economists and investors still labor under the illusion that there's a way out of debt that doesn't involve a drastic reduction in the paper value of wealth," says Reuters columnist Rolfe Winkler.

"Smart investors aren't so sure and want at least a portion of their assets out of the financial system."

World stock markets also continued to rise sharply Thursday morning, as did crude oil, base metals and soft commodities.

US and European corporate bond prices gained while government bonds slipped. Research from former investment bank Merrill Lynch said 37% of Asian clients it polled are now heavily invested in corporate debt investments.

The Euro and Sterling both rose vs. the Dollar after the ECB and Bank of England voted to keep their interest rates at all-time record lows.

The price of gold rose faster still, however, hitting new 7-month highs at €717 and £660 an ounce respectively.

"Gold prices suggest cash is cheap," writes Steven Barrow, chief currency strategist at Standard Bank in London, today. "[But] we think that bond yields can fall further still, quantitative easing is unlikely to end soon and, despite huge liquidity injections, cash is still not excessively cheap."

At the Bank of England's September vote, minutes from the meeting show, policy-makers agreed that rising property and stock-market prices could create a "virtuous upward spiral" for the UK economy.

Citing the global imbalances and "liquidity-driven" asset bubbles that led to the banking crisis starting in 2007, "Recent policy initiatives offer little reassurance" that government plans have changed, says Morgan Stanley's Roach in the FT.

"Cash-for-clunkers in America and cash for roads in China are emblematic of a penchant for quick-fix stimulus actions that risk compounding existing imbalances."

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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