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Gold Jumps on Strong European Inflation Data

Commodities / Gold & Silver Jun 16, 2008 - 06:50 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE OF GOLD jumped almost 1.3% from an early dip in London on Monday, rising above $879 per ounce as the latest European inflation data showed the cost of living rising at a 16-year record.

"Everywhere I turn, inflation is out of control," said Peter McGuire of Commodity Warrants Australia to Bloomberg TV overnight.


"I see Gold spiking again some time before the end of the year. I wouldn't be surprised to see it back over $1,000 or higher."

This weekend's meeting of G-8 finance ministers noted that "elevated commodity prices pose a serious challenge to stable growth."

But the summit failed to agree any concrete action and also ignored the issue of Money Supply Inflation altogether.

While a call from the Italian delegation to block financial trading in the world's food and oil markets was rejected by the US and UK teams, "the G8's focus was clearly not on currencies as markets had anticipated," notes Khoon Goh of ANZ-National Bank.

"Many were expecting a least some mention in the communique, given the effect a weak US Dollar has on commodity prices and therefore on global inflation."

Financial traders raised their bets on a European rate-hike this morning after Eurostat – the European data agency – said the cost of living in the 15-member single currency zone rose 3.7% in the year to May, the fastest clip since 1992.

Today the Gold Price in Euros jumped to a four-session high above €568 per ounce, even as the Euro added one cent to the Dollar at $1.5640.

Across the Channel in the United Kingdom – where a strike by fuel-tanker drivers demanding inflation-linked pay rises has now left up to 1 in 9 filling stations empty – tomorrow's Consumer Price data is expected to spark a open letter of apology from the governor of the Bank of England.

For British investors wanting to Buy Gold today, the price held near to last Friday's closing level at £447.50 per ounce as the Pound Sterling rose almost two cents to $1.9640.

Forecast at 3.2%, the CPI is supposed to stay within one per cent of the official 2.0% target. Yet the Bank of England has been cutting interest rates since December, however, in a bid to reverse the slump in residential real estate prices.

Construction of new homes is set to drop by 40% this year from 2008, says top home-builder Barratt, leading to the direct loss of 100,000 jobs.

But with the Pound Sterling sliding on the currency markets, household perceptions of UK inflation surged to 4.9% per year in May.

American households now peg US inflation for the year ahead at 5.2% per year – the fastest rate since 1982 – according to last week's Michigan Sentiment Survey.

"We all understand the danger of inflation," said Stuart Rose – head of top UK retailer Marks & Spencers – at a conference in London last week. "But the alternative [if interest rates rise] is stagflation, which is something you don't want."

"I'd prefer a bit of inflation," Rose said, before admitting that food-price inflation for British shoppers is now approaching 10% per year.

Strikes over rising fuel costs turned violent in Spain this weekend, reports Thomson-Reuters, while "authorities from Thailand to the Netherlands face protests over pump prices."

" Gold is starting to find its own feet in an inflationary environment," believes Simon Weeks, head of precious metals trading at the Bank of Nova Scotia.

"Over a longer period of time it should outperform most other commodities."

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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