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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Case for Gold "Strong" as IMF Urges Loose Money

Commodities / Gold and Silver 2011 Jan 26, 2011 - 06:52 AM GMT

By: Adrian_Ash


THE PRICE OF PHYSICAL gold bullion rallied from its lowest level since end-Oct. in what dealers called "quiet trade" in London on Wednesday, but remained nearly $100 per ounce off Dec.'s all-time highs ahead of today's US Federal Reserve announcement on monetary policy.

European stock markets rose over 1.2% meantime, as New York futures pointed to the Dow opening above 12,000 for the first time since June 2008 and the US Dollar weakened on the currency market.

Major-government bond yields ticked higher with energy and commodity prices. But the silver price gave back half of a 2.2% overnight rally, however, slipping back below $27 per ounce.

"The global banking crisis...along with a lack of fiscal prudence and debt consolidation during the good times...has had and will continue to have implications for the gold market," says market-development organization the World Gold Council in its latest Gold Investment Digest today.

"[It] provides a strong rationale for investors, both public and private, to use gold as a currency and inflation hedge, a means of preserving capital and protecting against tail-risk events."

After UK inflation rose at a 17-year record pace in Dec. but the economy shrank 0.5%, minutes from the Bank of England's latest policy meeting today showed a 3-way split on the 9-member committee.

Five members voted with governor Mervyn King for "no change", but "inflation hawk" Andrew Sentance was joined by 2010 recruit (and career academic) Martin Weale in voting for a 0.25% rise from the base rate's current 300-year low.

US academic Adam Posen, in contrast, again voted instead to raise the £200 billion quantitative easing program to £250bn, buying more financial assets with newly created money.

"Monetary accommodation needs to continue in the advanced economies," says the International Monetary Fund in its latest World Economic Outlook.

"As long as inflation expectations remain anchored and unemployment stays high, this is the right policy from a domestic perspective."

UK investors wanting to buy gold today saw the price rally but then slip back below £840 per ounce – a 3-month low – for the third day running.

The gold price in Euros held flat near its own 12-week low of €31,300 per kilo.

"A head and shoulders top is now in place – and confirms a medium term top – with a target at $1265," says Axel Rudolph at Commerzbank in his latest technical analysis.

"A close below $1315 would bring in fresh selling looking for $1294 and $1262," says bullion-bank Scotia Mocatta's latest analysis, pointing to Fibonacci retracements of 50% and 61.8% of the "previous up move" to December's record $1430 per ounce.

"The liquidation of a significant gold position may have played a part in our recent decline," says one London dealer in a note, after the SPDR Gold Trust – the world's largest exchange-traded gold fund, which vaults with HSBC Bank – saw a record one-day redemption of over 31 tonnes on Tuesday.

Figures from the US gold futures market meantime showed a sharp drop of 81,000 contracts – some 13% of the total open interest this time a week ago.

"Analysis suggests that many [Western institutional] investors shifted into the [physical wholesale] market during Q4 2010 from the ETF and futures market," says the World Gold Council's new report.

Demand for physical silver bars has also risen sharply – forcing tight supply and extended delivery times in London's wholesale center – even as futures positions and exchange-traded products have shrunk rapidly.

Tuesday saw the iShares Silver ETF – which vaults with investment-bank J.P.Morgan – redeem another one million ounces of bullion, cutting its holdings by almost 8% in the last month.

By Adrian Ash

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 , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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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