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Gold Rises as High Commodity Prices Are a Reflection of Monetary Inflation

Commodities / Gold & Silver Feb 11, 2008 - 12:05 PM GMT

By: Adrian_Ash

Commodities GOLD FOR IMMEDIATE DELIVERY pushed higher in volatile trade early on Monday, gaining 0.7% from Friday's close to reach $927 per ounce in London as world stock markets dropped yet again.

The broad FTSE index of Europe 's 300 largest companies slipped 0.5% for the day, while copper and most other base metals continued to gain as bad weather blocked Chinese output.


Crude oil dipped for the first session in three despite fresh threats to immediate supplies. Meantime on the currency markets, shock inflation data sent the British Pound one-cent higher against the Dollar, knocking the Gold Price in Sterling 0.8% off the new all-time record of £477.20 hit just as London opened for business.

"High commodity prices are just a reflection of monetary inflation," reckons Mario Innecco, a broker at MF Global in London , speaking earlier to Bloomberg.

"There is too much money chasing a limited supply of real goods" as central banks cut rates, he believes. The newswire's weekly survey of Gold Market professionals saw 19 bulls vs. four bears and four neutrals.

The survey has a 62% strike rate over the last four years.

"[Last week was] a new high weekly close for Spot Gold," as Christopher Langguth notes for Mitsui today. "It would have to fall to $884.50 to generate a sell signal. The selling should not become heavy unless it trades below $863.00."

"With the Fed beginning to sound more cautious on inflation and the US Dollar unable to sustain a rally, the near-term fundamental outlook for gold continues to improve," agree Stephen Abbriano and Robert Lockwood at Scotia Mocatta, the market-making bullion bank, in London .

"Funds continued to buy [on Friday]...Equity markets slumped but gold maintained its level as investors turn to it as a possible safe haven."

Saturday's news that the International Monetary Fund (IMF) may look to sell some of its 3,217 tonnes of gold – the third largest hoard in the world – failed to deter investors from Buying Gold in Asia overnight.

With the IMF looking to cover a budget deficit of $400 million per year, the US Congress would still need to approve the plan agreed by leaders of the G7 wealthy nations in Tokyo . What's more, "every time the IMF has sold gold it has actually triggered more buying interest," as Innecco at MF Global said to Bloomberg this morning.

"It will just make it easier for the big sovereign buyers" – the big central banks outside the G7 who want to build up their gold reserves – "to snap up cheap gold from the IMF ."

This morning saw stock markets in Japan , China and Taiwan closed for public holidays, but last week's losses continued across Australia , South Korea and Hong Kong , where stocks fell by 2% on average.

Grain prices, in contrast, jumped to fresh record highs. The top performing commodity of 2007 according to Reuters data, wheat jumped to $11.53 per bushel – more than 70% above the price of Feb. last year.

"We haven't seen this sort of price action in 25-30 years," said one analyst earlier. "People will pay anything to get into agricultural commodities."

The price of imported food in the United Kingdom rose by nearly 15% in the year to Jan., the Office for National Statistics said today, helping push input prices for UK industry to a new 16-year high of 19.1% per year.

UK-produced food rose by 36%. Output prices for manufacturers rose by only 5.7%, squeezing margins as domestic industry struggled to find pricing power.

"The January producer price inflation is really horrible and will likely send blood pressures higher at the Bank of England," reckons Howard Archer at the Global Insight consultancy. The data will "further limit the scope of the Bank to cut interest rates aggressively to try and reduce the danger of a sharp economic downturn over the coming months."

Last week the Bank of England cut its key lending rate for the second time since the world banking crisis began in August.

In 2007, the UK money supply grew by 12.7% – the fastest monetary expansion since the last top in the UK housing market of 1990.

By Adrian Ash
BullionVault.com

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 www.BullionVault.com , 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.

Adrian Ash Archive

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