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Gold and Silver Jump as GDP Data Reveal US Inflation Rise, Economists Urge QE

Commodities / Gold and Silver 2010 Oct 29, 2010 - 10:04 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD rose sharply at the start of New York trade on Friday, jumping 1.2% from an earlier low in London to hit $1352 per ounce – some 1.8% higher from last week's finish – as new data showed weaker-than-expected US economic growth, with much stronger-than-forecast price inflation.

World stock markets had already sagged before the Commerce Dept. said GDP expanded by 2.0% annually between July and Sept.


Third-quarter domestic inflation, in contrast, beat analyst forecasts by rising to 2.3% per year.

The gold price in Euros also rose on the news, hitting its own 8-session high above €31,200 per kilo.

Silver bullion touched $24.25 per ounce, adding nearly 3.7% from last weekend.

"Naysayers point to gold's price and see a bubble, without understanding that the only acceleration that is taking place is in the rate of decline of paper currency," writes John Hathaway of Tocqueville Asset Management at Bloomberg today.

Bearish analysts – though wrong – actually help investors, says Hathaway. Because they help keep prices from shooting too high, too fast, giving new buyers the opportunity to buy gold more cheaply.

"Anti-gold pundits provide a great service to those who grasp this historical moment...[where] we are past the point of no return.

"Quantitative easing may well become a way of life."

Urging $2 trillion of QEII, Jan Hatzuis at Goldman Sachs says that "The Dollar needs to fall a lot further from here if indeed the Fed sees the Dollar as one of its key policy levers for preventing [deflation]."

Citigroup's chief economist in London, Willem Buiter, meantime calls Japan's recent QE announcement "far too small to achieve anything", urging money-creation 20 times larger – some $1.2 trillion – and advocating time-limited gifts from the central bank of ¥100,000 for every adult.

"If Japanese consumers refuse to spend the check and save it instead, either attach an expiry date to the cheque...or send another check, this time for ¥1,000,000. Repeat this, adding zeros, until the consumer gives in and starts spending."

Japan's Nikkei 225 stock index lost 1.8% on Friday, closing at a 7-week low.

Tokyo gold futures meantime added 0.7%, rising to ¥3514 per gram – well over three times its price from when the Bank of Japan began quantitative easing in March 2001.

The Nikkei stock index closed Friday 30% down from that date.

"There is a strong case for an allocation to gold as an asset class on its own merits," says the latest quarterly report from market-development group, the World Gold Council.

"Gold is part commodity, part luxury consumption good and part financial asset, [so] its price does not always behave like other asset classes...making it very useful in periods of financial distress."

Analyzing how gold tends to rise when US stock markets fall sharply, "Investors who hold gold only in the form of a commodity index are likely to be under-allocated," says the WGC's report, "because gold's weight in typical benchmark commodity indices tends to be small."

European shares also fell on Friday, and New York stock futures pointed lower, after new data showed a stronger-than-expected pace of consumer-price inflation across the Eurozone, but no change in the 16-nation currency union's 10.1% unemployment rate.

German retail sales fell 2.3% last month from August.

Net lending to UK consumers meanwhile grew by just £400 million – the smallest Sept. total since Bank of England records began in 1987.

Now suffering negative real returns to cash – after inflation – for 28 months running, UK savers wanting to buy gold today saw the price head into the weekend some 0.4% lower from last Friday at £843 per ounce.

By Adrian Ash

BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

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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