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Gold New High Vs British Pound as Money Supply Growths Triggering Inflation Concerns

Commodities / Gold & Silver Feb 20, 2008 - 09:08 AM GMT

By: Adrian_Ash

Commodities GOLD FOR IMMEDIATE DELIVERY ticked 0.7% lower from last night's near-record highs early on Wednesday after recording its third highest London Fix ever.

Pegged at $924.8 this morning as crude oil slipped back from $100 per barrel and world stock markets fell yet again, the Gold Price also recorded a new all-time London Fix for British investors at £475.57 per ounce.

The Pound Sterling meantime fell towards an 11-month low on the currency markets, driven down by news that the Bank of England is set to continue cutting interest rates despite forecasting "sharply higher" inflation ahead.

Asian-Pacific equities averaged a 2% loss for the session while Europe's 300 largest blue-chip stocks stood 1.3% lower by lunchtime in Frankfurt, led down by financial stocks after the Financial Times reported that private equity group Kohlberg Kravis Roberts & Co. has deferred "billions of dollars" in payments to creditors of its listed KKR affiliate, first due last Friday.

"This follows a $270m bail-out of the leveraged investment vehicle last September," the FT adds, "which saw founders Henry Kravis and George Roberts personally inject cash."

European government bond prices ticked down even as US bonds pushed higher – forcing the yield offered by 10-year Treasuries down to 3.89% – while at the London Metals Exchange today copper futures rose 2.8%, zinc gained 3.5% and lead futures put on almost 4%.

Last night in Chicago soybeans rallied to a new all-time closing high, and grain prices rose this morning on news of falling Chinese exports and the extension of Russian export tariffs – costing 40% per ton – to the former Soviet states of Belarus, Kazakhstan,
Uzbekistan and Tajikistan .

"People are worried about inflation," said Tat Auyeung, fund manager at APEX Capital Management in Singapore , to Reuters earlier. "If oil prices continue zooming around these levels, it will be tough for the Fed to cut rates aggressively."

Minutes from the Federal Reserve's last meeting – when it slashed the returns paid to Dollar holders to a three-year low – will be released at 14:00 EST today.

Before that, however, comes the Consumer Price index for January, last recorded at an 18-month record of 4.1% year-on-year in December.

Today in Hong Kong the H-Shares index of mainland Chinese stocks dropped 3.0%, as did the Nikkei in Tokyo . Japanese gold futures for delivery in Dec. '08 meantime rose 1.3% to hit a fresh 25-year high.

"Increasing petrol prices are going to dampen [stock market] confidence even further," reckons Tony Russell, a senior equities adviser at ABN AMRO in Australia .

"Inflation is a major concern for the various central banks around the world at the moment."

But if that were true, policy makers at the Bank of England would not be cutting interest rates right now – and despite consumer-price inflation wildly over-shooting the BoE's 2.0% target, today's release of minutes from the Bank's latest meeting show it voted 8-to-1 vote to cut Sterling interest rates by another 0.25% at the start of Feb.

The lone dissenter, US academic David Blanchflower, wanted to cut rates by 50 basis points to a 15-month low of 5.0%.

"The price of oil and corn could not give a monkeys about what the interest rate in little old England is," claims Simon Denham, the head of Capital Spreads, for The Daily Telegraph online today.

But if the UK's low-to-negative real interest rates (after inflation) of the last five years aren't part of the problem, just where does Denham think the money now pushing raw material prices higher worldwide first came from?

Eurozone inflation has jumped to a 14-year high on the back of near-record monetary inflation. Growth in the US money supply is pegged at 15% per year by private analysts. And new data out today shows the UK 's broad money supply growing nearly half-as-fast again in January as its average growth rate of the previous six months.

Expanding by 12.9% last month, the M4 measure has now grown at a double-digit annual pace every month since March 2005, adding almost £486 billion ($942bn) to the UK 's money supply in the last three years alone.

New private sector lending, however, has grown by a massive £758 billion ($1.47 trillion) – equivalent to more than half of one year's entire UK economic output.

"Commodities surge, but look at the reasons," says Bob Pisani of the US raw materials markets for CNBC today.

Again, Pisani ignores the impact of monetary inflation on the cost of living, citing instead "tight supply issues and strong demand."

Back in the precious metals market today, silver prices ticked 0.2% alongside Gold Bullion while platinum – now more than 45% higher from the start of January alone – fell over 3% as Tokyo speculators closed their positions ahead of a sharp increase in trading costs at the Tocom in Tokyo tomorrow.

As the South African energy crisis continues to cap mining output from the world No.1 producer, the Tocom will raise its margin requirements for all new and existing platinum future positions by ¥50,000 (some $471) per contract.

"The market has been surging and psychological pressure was already growing as platinum has been overbought," believes Shuji Sugata, a manager at Mitsubishi Corp. Futures and Securities in Tokyo .

"Tocom's margin increase became a good reason to prompt corrective sales."

New mining supplies of platinum outweighed physical demand in 2007 by 25% according to data from Johnson Matthey, the world's No.1 distributor of the white metal.

More than three-quarters of total platinum demand comes directly from the chemical, auto and electronics industries. Industrial use of physical gold, on the other hand, accounted for only 15% of total demand last year, says the GFMS consultancy in London .

The rest came from private investors and jewelry buyers – most especially the "investment jewelry" buyers of Indian and South-East Asia .

Data released by the World Gold Council on Tuesday shows Chinese gold jewelry sales reaching a record high of 302 tonnes last year, up by 34% from 2006 and over-taking the United States to come second only to India .

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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