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Gold Hits New Euro High, US Threatens "Soft Default" via 9% Inflation

Commodities / Gold and Silver 2010 Feb 16, 2010 - 08:00 AM GMT

By: Adrian_Ash

Commodities

THE WHOLESALE PRICE of gold bullion rose at both the Asian and London openings on Tuesday, breaking new record highs versus the Euro as finance ministers from the 16-country currency zone met to discuss Greece's ongoing debt crisis.

Crude oil broke above $75 per barrel, while global stock markets rose some 0.7%, as Eurozone government bonds fell.


British gilts rose despite a 14-month high reported in UK consumer-price inflation.

"There is no particular reason for the gold market's firmness," said Yuichi Ikemizu for Standard Bank in Tokyo to Reuters earlier.

"There was some indication of short positions being squeezed, but it's very thin and prices are likely to stay firm given a lack of sellers."

Ahead of New York re-opening after the Presidents Day break, Dollar gold prices added 1.6% to a two-week high of $1117 an ounce on Tuesday.

The gold price in Euros rose 1.2% to touch a new record high of $817.84.

All Eurozone bonds fell in Frankfurt trade, but 10-year Greek bonds yielded well over twice what comparable German debt offered.

Portuguese and Irish bond spreads widened to 1.43% and 1.53% respectively above the benchmark bund, now yielding 3.20%.

"We won't abandon Greece," announced France's Christine Lagarde this morning, speaking to reporters ahead of the finance ministers summit.

"It's clear that we are all in this together."

Rebuking both Lagarde and Athens' finance minister Papaconstantinou, however, Eurozone chairman Jean-Claude Juncker today told German radio that Greece's debt crisis is "first and foremost a Greek problem and an internal Greek problem."

However, "While hard default is inconceivable, soft default through inflation is a clear risk," says Morgan Stanley analyst Spyros Andreopoulos of the United States' long-term budget deficit.

Even if Washington cuts its annual fiscal deficit from 9% to 5% of the US economy each year from now until 2020, Andreopoulos writes, "Stabilizing the [total] debt at current levels would then require an inflation rate of 9% on average over the next 10 years."

(What do Greece's troubles say for broader Western debt? Read Athens-Upon-Tyne here...)

The Euro bounced to $1.3650 on the forex market early Tuesday, but held in sight of last week's drop to its lowest Dollar-value since May last year.

Sterling meantime whipped near its own 9-month lows after Jan.'s inflation data failed to match analysts' expectations.
 
Inflation on the Consumer Price Index – targeted by the Bank of England at 2.0% per year – hit 3.5% in January, rather than the 3.6% forecast.

Already averaging 2.9% across the previous 18 months, today's figure forced governor Mervyn King to write an open letter defending the BoE's current 0.5% interest rate policy, claiming that the rise "should only be temporary".

Tax-protected cash ISA savings accounts last month paid an average of minus 4.2% real annual returns, Bank of England data shows.

Gold bullion priced in Sterling – hitting a 5-week high of £711 an ounce earlier today in London – has risen 52% since ISA accounts first began lagging inflation in June 2008.

"Silver has suffered more than gold in the recent correction, both price-wise and in terms of the Comex net long [speculative] position," says the latest Precious Metals Investment Weekly for Fortis Nederland Bank, published by the VM Group consultancy.

The "cumulative decline" in speculative silver futures demand since the last week of Jan. is now "the largest in a three-week period since 2005," says VM.

"Silver ETF investment, however, [has] headed the other way," rising 0.6% from the late-Jan. low on VM's data.

"A bounce in gold is often – but not always – accompanied by a better one in silver," writes GFMS Analytics director Rhona O'Connell for MineWeb, "especially if it involves short covering" by formerly bearish speculators

"But the key word here is volatility...Over the period of price weakness from early January to mid-February, gold fell 7% from the high. Silver fell 21%."

Silver prices rose to their best level in a fortnight by lunchtime Tuesday in London, hitting $15.93 an ounce to recover almost 30% of Jan-to-Feb.'s drop.

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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