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Gold "Supported by US Fed" as Eurozone Faces 1st July "Liquidity Drought"

Commodities / Gold and Silver 2010 Jun 23, 2010 - 08:47 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD in wholesale dealing reversed an earlier 0.6% gain as New York opened for business on Wednesday, slipping back to its overnight range around $1239 an ounce.

Broad commodity markets ticked lower as Asian stocks closed the day lower and G7 government bonds rose.


The US Federal Reserve was set to announce its latest interest-rate policy – unchanged in 18 months – at 14:15 ET.

"There should be few surprises," says Walter de Wet at Standard Bank.

Noting the 65% chance of rates staying below 0.25% until May 2011 that's currently signaled by US futures, "We believe [interest rates] will be flat for longer...guided by the Taylor Rule," he says.

"[It] still indicates the Fed funds rate should be negative, because inflation is low and unemployment so high.

"For this reason, we still see support for gold despite the metal touching all-time highs almost every month. We still favor buying dips."

UK investors wanting to buy gold today saw the price dip to a 1-week low of £831 an ounce, as the Pound reached a new 6-week high on news of the first dissent over Bank of England interest rates since Aug. 2008.

UK retail-price inflation is running at a 19-year high above 5%. Base rate has now been held at 0.50% since March 2009.

When the executive met a fortnight ago, one BoE member – economist Andrew Sentance – voted for a 0.25% hike.

Gold priced in Euros meantime unwound the last of Monday's 1.5% drop, trading back above €32,600 per kilo.

"July 1 could be the day liquidity dies," says FT Alpha, quoting Barclays' analyst Joseph Abate, who notes that next Thursday will see €442 billion ($542bn) pulled out of the Eurozone money markets when the first – and largest – of the European Central Bank's long-term refinancing operation (LTRO) expires.

Abate forecasts a jump of perhaps 0.75% in short-term interbank lending rates.

The global financial crisis is generally agreed to have begun with a jump in interbank interest rates on 9 Aug. 2007.

"We [also] believe silver is also well placed for a move higher on the back of gold," says Standard Bank's de Wet, a view expanded by the VM Group's new 2010 Silver Book for Fortis Bank Nederland.

"Silver price support has increasingly come to depend on investment demand more than industrial demand," the report says, pointing to "explosive growth in supply.

"However, new and emerging end uses for silver could well pick up the baton from photography...Solar, medical, textile, radio frequency identification, water purification, and food hygiene, among others, will more than offset the decline in photographic consumption and lead to the silver market surplus eroding significantly by 2020."

Silver prices today peeped above $19 an ounce for only the fifth time since March 2008.

The volume of Silver Bars held for exchange-traded trust funds – which enable investors to track the price without owning metal – rose 0.1% last week, according to VM Group data.

Gold ETFs worldwide, however, added 0.3% to their hoards on Tuesday alone, reports Bloomberg, taking the total held in trust to 2,050 tonnes.

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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