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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Wholesale Credit Creation Benefits Gold

Commodities / Gold & Silver Dec 19, 2007 - 09:34 AM GMT

By: Gold_Investments

Commodities


Gold was up $8.40 to $802.90 per ounce in New York yesterday and silver was up 22 cents to $14.03 per ounce. Gold traded sideways in Asia and Europe and the London AM Fix was at $801.50 (up from $796.25).

At the London AM Fix gold was trading at £399.352 GBP (marginally up from yesterday's London AM Fix at £395.67) and €556.83 EUR (up from yesterday's London AM Fix at €553.53 ). Gold has increased in sterling and in euros. The recent record highs for gold at the London AM Fix on the 7th of November were $841.75, £400.47 and €573.55. Gold is thus very close to surpassing it's all time record high in british pounds at £400.47.


The dollar has rallied probably primarily on year end short covering and this may have curtailed gold's gallop in the short term. Most of today's key releases are now out of the way and there is little in the way of top-tier economic data for the rest of the day. Later today Treasury Secretary Paulson and Richmond Fed President Lacker are both out speaking on the economy.

Controversial politician Jacob Zuma is expected to be named president of the ruling African National Congress, which would make him the automatic choice to become South Africa's president in 2009. Zuma enjoys huge support from communists and unions, and investors fear he may lead South Africa's economy on a more left-leaning course. Some of his supporters support nationalisation of key industries. This is will likely lead to extra support in the gold and platinum markets. Resource nationalism is alive in Russia, sweeping South America and now in Africa.

The end of year Christmas period is traditionally a strong period for gold. When western markets are closed, Middle Eastern and Asian markets take precedence and this physical buying can result in higher prices.



This is especially the case as western central banks are opening the money taps at full blast in an effort to head off a liquidity and possible solvency crisis. The European Central Bank today allocated more than $500 billion in euros to banks at below-market interest rates. Banks with sufficient collateral submitted bids at interest rates as low as 4.2 percent. The FT said that the action has stunned investors. Analysts fear banks are hoarding funds because they fear further big credit losses next year. Banks still face considerable difficulties as a result of the global credit squeeze. The US Federal Reserve will on Wednesday publish the results of an exceptional $20bn auction it performed on Monday to inject funding into the US financial system.

Martin Wolf wrote an article in the FT 'The helicopters start to drop money': "The central bank helicopters are planning a co-ordinated drop of liquidity on troubled market waters. The money to be dropped now is not that large. But if this does not work, more will surely follow. The helicopters will fly again and again and again." This is Federal Reserve Chairman's Alan Greenspan's phrase 'fiat money in extremis'. In 1999 Greenspan told US Congress that "Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted."

Wholesale massive credit creation is the order of the day and this monetary debasement can only be bullish for the universal finite currency that is gold. Gold will thus continue to rise in all major currencies and not just the dollar. Actually, it is mistaken to think that gold is rising in terms of various currencies. Rather these currencies are losing their value or purchasing power in relation to gold.


Silver
Silver is trading at $13.99/14.01 at 1200 GMT after yesterday's rally.

PGMs
Platinum was trading at $1505/1510 as per above (1200 GMT).
Spot palladium was trading at $352/356 an ounce (1200 GMT).

Oil
Oil remains at elevated levels above $90 per barrel and NYMEX light sweet crude oil was trading at over $90.16 a barrel.

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