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Gold Steadies Above $900 as Bond Market Igores Rising Inflation Fears

Commodities / Gold & Silver May 20, 2008 - 09:38 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE of physical Gold bullion moved sideways around $907 per ounce in London on Tuesday after what Mitsui Bussan in Hong Kong called "a sluggish morning session with early selling."

The AM Fix in London rose 50¢ from Monday's afternoon price to $907 per ounce.


That was almost 8% higher from the start of the year, but down slightly from this point in April.

"Gold is sentiment-driven and speculative-driven in nature," notes Simon Weeks at ScotiaMocatta, the precious metals dealer in London .

"At the moment the news tends to be more bullish than bearish for gold."

The Euro today rose to a four-week high of $1.5670 as crude oil moved back above $127 per barrel.

Here in London the FTSE100 stock-market index reversed its last two days of gains, dropping 1.4% by lunchtime.

For British investors wanting to Buy Gold today, the Morning Fix in London came in at £462.63 per ounce – almost 9% above the starting level in January.

The Gold Price in Euros , which has risen 5% so far in May from a five-month low, was set at €580 per ounce.

"Investment funds and pension funds are still in the early stages of taking in interest in commodities, so we think there is more to come there," says Jill Leyland, economist at the World Gold Council (WGC).

"While some investors are judging the worst of the financial crisis to be over, inflation remains a major concern. With gold viewed as a hedge against inflation, it could take good support."

Today the WGC released its analysis of global gold demand for the first three months of 2008, highlighting a 16% drop in total demand compared with the first quarter of 2007.

Jewelry demand fell by more than one-fifth as Gold Prices soared above $1,000 per ounce, falling to the lowest level since 1993.

"Jewelry demand is likely to remain muted during the second quarter of 2008," believes WGC director James Burton.

But once "stability" returns to prices, says Jill Leyland, physical buyers will return – even if prices remain at their current levels.

"[Physical buyers] adapt after a pause...once the price settles back. They provide a physical floor for the market and we've had a rising floor over the past [eight] years."

Meantime in the bond market, however, US Treasury prices point to a drop in inflation rates by next January reports Bloomberg today. Consumers and business owners, on the other hand, expect the cost of living to rise sharply.

The University of Michigan 's latest survey of consumer price expectations is the most pessimistic since 1982. The percentage of small US business owners citing inflation as their No.1 concern also reached a 26-year record of 14% last month says the National Federation of Independent Business (NFIB).

Almost one third of NFIB respondents in April said they plan to raise their sales prices – "reminiscent of the 1970s as companies raise prices even under conditions of weak domestic demand," says Tim Bond, head of asset strategy at Barclays Capital, in today's Financial Times .

Yet Treasury Inflation Protected Securities (TIPS) are pricing inflation at 2.95% for Jan. 2009 – "in line with its average of 3.1% over the last 20 years," as Bloomberg notes.

"The disparity [between consumer and bond-market inflation forecasts] has never been wider."

The Michigan survey says US consumers expect inflation to reach 5.2% by this time next year – up from the current 3.9% rate.

"Five years ago, a new agriculture bull market got under way which, to date, is only a quarter of the average historical bull market duration for this sector," believes Frederic Hervouet, head of commodity futures in Asia for BNP Paribas.

The shortest commodity bull market on record lasted 15 years, he tells Malaysia 's StarBiz today. The longest took 23 years to peak.

In Wiesbaden , Germany today, the official statistics agency reported the sharpest rise in manufacturing input prices since Aug. 2006 at 5.2% per year.

The latest US producer-price index – which inflated by 6.9% annually in March – is due for release by the Dept. of Labor at 09:30 EST.

US consumer confidence, as measured by the monthly ABC survey, will be reported this afternoon at 17:00 New York time.

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.

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