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Gold Confirms 10-Year Bull Marketm Supported by Inflation and Low U.S. Interest Rates

Commodities / Gold and Silver 2010 Feb 26, 2010 - 07:43 AM GMT

By: Adrian_Ash

Commodities

THE WHOLESALE price of gold in Dollars held steady on the release of new US economic data Friday morning, nearing February's monthly close some 2.8% above January's finish and confirming the last 10 year's pattern of never falling for more than two months running.


World stock markets also ticked higher, while crude oil and government bonds were little changed, as the US Bureau of Economic Analysis revised Oct-to-Dec.'s GDP growth sharply higher to 5.9% annualized.

Price inflation was pegged two-thirds faster from the first estimate at 2.3% per year.

"A high gold price is a sign of high worldwide inflation fears," notes economist Chris Dillow in the UK's Investors Chronicle today.

"Although the outlook for inflation is stable according to the Federal Reserve," write Bradley George and Daniel Sacks at the Investec Global Gold fund in a new client report, "we believe the [Fed's] reaffirmation that rates are likely to remain low for an extended period should be supportive of gold prices in the long term."

Thursday's rumor that China's central bank had "confirmed" it would the remaining 191 tonnes of IMF gold now for sale were denied by their Russian author, who told Reuters she had only repeated existing comments and was unaware the price had jumped on her "news".

Rallying 1.8% however, Gold was then pushed higher again by what several London dealers today call "short covering" – where bearish players were forced to close their bets by rising prices.

"Since gold exports from China are banned, we can assume that some of the 310 tonnes of gold mined by the country in 2009 has already been added to the1054 tonnes of existing reserves," says the latest Commodities Weekly report from Patrick Artus' team at Natixis in Paris.

"[But] although China certainly remains interested in acquiring international gold mines, they may balk at buying 191 tonnes [of Gold Bullion] on the open market at prices above $1100 an ounce."

"I don't believe it makes sense for China to make such a big public purchase of the remaining gold," agrees David Barclay at Standard Chartered in Hong Kong, speaking to Reuters.

"You can see the impact when India bought [200 tonnes in Oct]. Prices went on to rally substantially after that. China has added sensitivity over the fact that it's got such large Dollar holdings."

Cutting this week's US$30-per-ounce loss by two-thirds for an AM Gold Fix of $1112.50 in London today, gold rose against all other major currencies too.

Heading into the close with a week-on-week gain for Australian, UK and Canadian owners, the price of gold held for the tenth session running above €800 an ounce for Euro investors.

Only 87% as volatile as US Dollar-gold prices over the last 10 years on average, the Euro price has become less volatile still this month, displaying a 1-month volatility of 14.2%.

Gold priced in Dollars now shows an 18.5% volatility.

"Investors reacted quite sharply to the China rumors," notes MKS Finance in Geneva, "and the [Dollar] volatility implies the market is still quite thin."

"From a daily close basis, it seems gold is unable to move below 1098," says London market-maker Scotia Mocatta. "We see resistance at 1111 and then at the Monday high of 1131."

In the wholesale gold bullion market, "Physical buying interest has slowed substantially only a few days after the Chinese New Year," reports Walter de Wet at Standard Bank.

"The fact that gold is holding up well in other currencies (such as Euro, Indian Rupee, etc) makes physical buying less attractive at the moment. However, we also note that there large volumes of scrap selling are not as prevalent as in [early] 2009.

"Given the lack of scrap coming to the market, once the Dollar starts to depreciate, a sizable increase in the gold price may follow."

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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