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Gold Rises on "Perfect Storm" - Falling Interest Rates and Rising Inflation

Commodities / Gold & Silver Feb 08, 2008 - 12:47 PM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD jumped almost 1% at the London opening on Friday, building on solid overnight trade to reach a one-week high of $916 per ounce as Asian stock markets sold off yet again and European equities held flat.

The Nikkei on Tokyo ended the week 3.6% lower, while crude oil rose almost $1 per barrel in London on new supply problems in both Nigeria and the North Sea .

Copper prices meantime headed for their biggest weekly gain since May '07 after Codelco – the world's largest copper mine – said output fell 5.3% last year.

Earlier this week, China 's second-largest copper producer – the Jiangxi Copper Co. – said that its smelting output has fallen by 70% thanks to the severe snowstorms still crippling the country.

Despite the ongoing threat of commodity-led inflation, however, "headlines out this morning say central banks around the world will have to follow the lead of the US and UK and start to cut rates," notes today's Gold Market report from Mitsui, the international metals dealer.

"With the global economic slowdown, one has to wonder where to place investments, and this is where the precious metals benefit. It's for this reason Gold Prices have remained firm despite the declining Euro."

In the three months to mid-Jan., gold priced in US Dollars showed a growing correlation with the EUR/USD exchange rate which rose to 0.71 from 0.67 between Aug. and Sept.

A perfect correlation of 1.0 would mean they moved in lock-step.

So far in 2008, however, the Gold Price in USD has gained 9.1% while the Euro has dropped nearly three cents against the Dollar. And even as gold shot higher in London this morning, the single currency slid to a 13-session low after Germany reported a sharp slowdown in industrial production.

The world's third largest economy also reported a marked decline in its trade surplus, down from €19.5 billion in Nov. to €10.8bn in Dec.

The Euro was also capped by a final verdict against the European Union from the World Trade Organization over the region's banana import tariffs.

Across the border in Switzerland , meantime, consumer-price inflation for Jan. was reported at 2.4% annualized – a sudden 14-year high. But with overnight interest rates standing at only 2.26% annualized, the Swiss Franc has now lost 3% of its value against the US Dollar since the start of Feb. alone.

"Much of the motivation [for the flight into Gold Bullion] is wealth preservation in the face of growing financial instability," according to a report from Natixis Commodity Markets in London .

Citing a "perfect storm" for gold – led by falling interest rates around the world – Natixis believes gold could reach $1,000 an ounce in 2008.

Longer-term, $10,000 an ounce may not prove out of the question claims Shayne McGuire – director of global research at Texas State's $115 billion Teacher Retirement System – in a new book published this week by John Wiley & Sons.

On the supply-side, meantime, AngloGold Ashanti – the world's third-largest gold producer – has admitted that its output in 2008 may be 400,000 ounces lower than previously forecast thanks to South Africa's current electricity cuts.

The company's new CEO also wants to close out its "hedge book", built up as the Gold Price fell during the late 1990s but now costing it more than $101 per ounce.

Mark Cutifani, who took over at AngloGold Ashanti in Oct., plans to use 2.4 million ounces of its 2008 output to settle forward gold sales. During the last three months of 2007, its hedge-book meant Anglo earned an average of $687 an ounce against the average spot Gold Price of $788.

Global gold mining production in 2007 fell 1% from a year earlier, according to the GFMS consultancy in London . Newmont Mining – the world's second largest gold miner – said yesterday that its sales fell 9% in 2007. It now expects 2008 sales to match last year's disappointing total, with the total cost of sale rising by up to 10% per ounce.

Newmont's stock, already down 9% from Monday's opening, was little changed on its fourth-quarter results. NEM has risen 11% from the start of January.

The price of what Newmont produces, in contrast, has risen by more than one-third.

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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 2008

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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