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Gold's New Record Highs Tell of Inflation Threat from Sovereign Debt Crisis

Commodities / Gold and Silver 2010 May 12, 2010 - 08:04 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF PHYSICAL GOLD in London's wholesale market jumped to new all-time highs against all-but-three of the world's major currencies on Wednesday morning, breaking US$1245 an ounce by lunchtime.

German and US government bonds slipped as world stock markets rallied together with crude oil and base metals.


British gilts rose further however – and the Pound jumped towards a 17-month high in terms of the Euro – as further details of the UK's new Conservative-led coalition government were announced.

Gold priced against the European Euro broke above €980 an ounce (€31,500 per kilo), extended its 2010 gains to 28%.

"Spot gold in Euros is getting ever closer to the €1000 mark," says Axel Rudolph at Commerzbank in Luxembourg.

"We remain long-term bullish as long as the gold price in Euros trades above the March low at €800.42 an ounce."

"The [€750bn] super-financing plan launched by the European Union to save countries in distress has not produced the hoped-for results," says Filippo Finocchi from the trading desk at bullion dealer Italpreziosi in Arezzo, Italy.

"There is a sentiment of fear and uncertainty amongst investors, who see gold investment as an excellent safe haven."

Finally breaking a 30-year high against the Swiss Franc late on Tuesday, the gold price today rose to CHF 44,400 per kilo in Zurich.

Tokyo investors wanting to start buying gold saw the Yen price move to a new 27-year high above ¥3700 per gram.

Gold priced in Canadian Dollars lagged a new top, however, rising within 2.2% of last week's record high as a bounce in crude oil and other natural resources pushed the "commodity currency" higher on the FX market.

Australian investors saw the price of gold rise to a 14-month high at A$1390 per ounce.

"Even though inflation is yet to break out, the price of gold is telling us that this threat is very real over the longer term. People rightly so do not trust fiat money anymore," says Greg Gibbs at London's state-owned RBS bank in a note.

"You can talk all you like about sterilization," Gibbs explains – meaning the ECB's promise to sell other government bonds when buying Greek debt on the market, thus leaving the money supply unchanged amid the weekend's $1 trillion Eurozone stability package.

"But when the central bank is forced into [buying government bonds], you can be sure they will not be raising cash rates. They will aim for negative real rates...Whether nominal GDP growth arises from higher inflation or real growth will be of second order importance."

"The ECB claims that its bond-buying operation will be sterilised and so have no monetary counterpart," agrees Steve Barrow at Standard Bank today.

"But add this to the bond purchases carried out by the Fed and Bank of England – and other operations by central banks that can expand liquidity, like the Swiss National Bank's purchases of Euros...[and] this Eurozone crisis will lead to much greater liquidity, despite ECB denials."

Given that banks are ploughing all this extra into financial assets – rather than into new loans to business – "the disconnect between the global economy and asset prices could grow even wider," says Barrow."

Presenting the Bank of England's latest quarterly Inflation Report today, "There are clear signs that world trade and output have begun to recover," said the UK's chief central banker, Mervyn King.

"But the financial crisis is far from over. Debt has moved from the financial to the public sector [and] the banking crisis has turned into a potential sovereign debt crisis."

Reporters from the Wall Street Journal, reporting on the surge in gold prices, were told yesterday that "You'll miss the whole picture by focusing only on the US," by Juan Carlos Artigas, manager for investment research at the World Gold Council in New York.

"Buying was exceptionally strong [Tuesday] from German and Swiss investors," today's Financial Times quotes the traders and gold coin dealers it interviewed.

"In Frankfurt, gold sellers said that demand late last week was three to four times normal levels."

Amongst the gold-backed trust fund securities, the world-leading SPDR Gold Trust yesterday held onto Monday's 0.3% increase in the volume of Gold Bullion it holds at bank vaults, maintaining it at a record 1191 tonnes.

London's ETFSecurities said its Gold ETFs held a record 251 tonnes of gold all told, with 0.6 tonnes in Zurich bank storage.

BullionVault users – who own their metal outright – now hold more than 15 tonnes of gold in secure, non-bank Swiss vaults.

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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