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Gold and Base Metals Breaking Currency Link

Commodities / Gold and Silver 2010 Jan 20, 2010 - 07:37 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD for Euro investors rose for the third session running in Asia and London on Wednesday, but slipped to $1125 vs. the Dollar as global stock-markets and commodities fell on news of fresh credit tightening by the Chinese authorities.


Liu Mingkang, chairman of the China Banking Regulatory Commission, announced that credit growth will be restricted to CNY 7.5 trillion ($1.1 trillion) in 2010, down by one-fifth from last year's break-neck pace.

New data then showed US factory-gate prices rising 4.4% last month from a year earlier, just shy of analyst forecasts.

White sugar prices here in London touched a two-decade high as traders bet that major importers such as India and Pakistan will soon face shortages.

"The ability of [gold] to remain above its 100-day moving average is a positive signal," says technical analysis from bullion bank Scotia Mocatta.

"[Gold's] 9-day moving average is above the 21-day average, which is a bullish sign for near-term traders," and for silver, "Most technical studies are [also] in buy territory."

Looking at copper and aluminum, "The base metals [also] appear to have largely broken clear of their currency link," writes Leon Westgate at Standard Bank today.

"Prices in both Dollars and Euros have rallied on the back of a combination of the global growth story and signs of genuine demand."

Following China's decision to raise both bank-reserve ratios and short-term bond yields, "We shall control, and we have already controlled, credit growth...with corrective actions to limit excessive exposure," said China's Liu today.

Hong Kong shares lost 2% on the news, and Shanghai equities fell almost 3%.

UK and Eurozone bourses also dropped hard at the start of trade, while the European single currency sank below $1.4140 – its lowest level since mid-August.

"The Euro closed below its 200-day moving average on Tuesday," notes one precious metals dealer in a note.

"The difficulties of operating a collective currency scheme between nations in various stages of economic recovery is becoming more apparent by the day."

Over the 10 years since the Euro was launched, the price of gold, silver and the other precious metals has typically moved in the same direction as the single currency against the US Dollar.

But platinum rose to fresh multi-month highs early Wednesday as physical traders bet on continued growth in the new US exchange-traded fund.

The Gold Price in Euros briefly broke above €800 an ounce for only the third time ever, coming within €13 of December's all-time peak.

Gold priced in British Pounds also rose after the Bank of England signaled that low interest rates and quantitative easing will continue despite the record surge in UK consumer-price inflation reported yesterday.

Claiming that the Bank's £191 billion government-bond purchases have "injected money into the economy [and] averted a potentially disastrous monetary squeeze," governor Mervyn King said in an after-dinner speech last night that "Rather like the Monetary Policy Committee, the owners of [race horse] Quantitativeasing, winner of all three of his races in 2009, have yet to decide how many outings he will have in 2010.

"They are waiting for race conditions to become clearer."

Sterling fell more than 2¢ today from Tuesday's 12-week high of $1.6450 to the Dollar. The gold price for UK buyers unwound yesterday's 0.7% drop to stand unchanged for the week above £695 per ounce.

"There has been much discussion about whether the gold price has already peaked," commented Phillip Klapwijk of London's GFMS Ltd. last week, launching the consultancy's latest 2009 data, "but our base case is that the economic recovery will prove sluggish.

"This suggests that there may be little or no tightening of fiscal and monetary policies this year in a number of the major economies, most pertinently for gold, including the United States."

"Money printing does not make a country rich," says Dr.Marc Faber, the Swiss asset manager and author now based in Thailand, speaking on Bloomberg.

"In terms of purchasing power, in terms of world GDP, the US is going down not up.

"Today the emerging world consumes more oil than the developed world...it has higher car sales...higher semi-conductor sales."

China overtook India in 2009 as the world's No.1 private consumer of physical gold bullion, with sales equating to some 2.0% of China's famously massive household savings.

Looking ahead to 2010 and beyond, growth in global gold mining production "will be marginal and [last year's 6% rise] does not represent a change in trend," says GFMS's Klapwijk.

Gold scrap returning to market from jewelry owners rose 27% last year according to the group's latest analysis, almost matching new jewelry fabrication for the first time since the early 1980s.

But global gold investment demand more than doubled to become the primary source of physical buying – and "Scrap needs much higher prices to stimulate a further rise in supply," Klapwijk believes.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly 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 2010

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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