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Gold Jumps to New Dollar High as T-Bonds Pose Risk to Asian Central Banks

Commodities / Gold and Silver 2010 Jun 18, 2010 - 09:10 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD jumped to new record highs for Dollar investors on Friday morning, peeping through the "resistance" identified by several bank analysts at last week's peak of $1254 an ounce.

European stock markets held flat but emerging Asia ended the week 3.6% higher – the best showing of 2010 so far.


Commodity prices fell, with US crude oil contracts losing 1% to $75 per barrel.

G7 government bonds slipped in early trade, nudging interest rates higher.

"The direction of official [government] policy looks inflationary, but the economic fundamentals look deflationary," says Phillip Coggan's Buttonwood column in today's Economist magazine.

"Faced with this dichotomy, investors who buy both Treasury bonds and gold are not displaying cognitive dissonance. They are just hedging their bets."

"Given the possibility of a further decrease in the Dollar, it is risky for [Asian central banks] to depend heavily on US Treasuries," says veteran gold trader Bruce Ikemizu at Standard Bank in Tokyo.

"Gold may be their best option as it is nobody's liability," he tells Bloomberg.

Last night's new all-time record close in US Dollars encouraged "fresh positions looking for the break higher" in gold says one London dealer.

"The $1267 level [in gold] is our short-term Elliot wave target," says another technical analyst.

UK investors wanting to buy gold today saw the price rise to £850 an ounce, as Sterling retreated from a 3-month high to the Dollar on news of weaker-than-expected UK mortgage lending.

The Euro held in a tight range on the forex market, putting the gold price in Euros 1.4% higher at €1018 an ounce.

"The high price of gold is...a story of [Eurozone CDS bond insurance] rates affecting the stability of the Euro, which in turn is affecting the price of gold as investors flee from the Euro to the Dollar or directly into gold," says Nic Brown's analysis team at Natixis.

The French bank's weekly commodity report notes that, on a rolling 3-month basis, the correlation between the US Dollar and gold has flipped from –0.75 to +0.85.

It would read +1.0 if gold and the Dollar-Euro exchange rate moved together in lockstep

"Given that gold is an international store of value, its price in dollars should be inversely related to the value of the Dollar," says Natixis. "So conditions must be extreme to push the correlation so far into positive territory."

One week before the G-20 group of leading economies meets in Toronto, "Economic policy around the world has taken a major wrong turn, and the odds of a prolonged slump are rising by the day," says Nobel prize-winner, Princeton economist and New York Times columnist Paul Krugman. 

"German politicians seem determined to prove their strength by imposing suffering – and politicians around the world are following their lead."

"Are these hardships necessary?" asks the Financial Times' Samuel Brittan of the latest UK and German 'austerity' measures.

"There is some hope that the more pragmatic German and French leaders may make their austerity a matter of words more than deeds. And all is not lost so long as the Obama administration and China's leaders stick to quasi-Keynesian policies."

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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