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Gold Jumps on Central Banks Failure to Act Against Inflation

Commodities / Gold & Silver Jun 26, 2008 - 10:42 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE OF GOLD jumped ahead of the Wall Street opening on Thursday after the Federal Reserve left US interest rates some 2.0% below the rate of inflation.

Breaking $908 per ounce, Gold rose above last week's closing level as crude oil bounced and the US Dollar fell hard on the currency markets.


The London Gold Fix had earlier recorded its best level since Monday morning at $892.50.

"Given gold's sensitivity to inflation and the monetary response to inflation," says James Steel, metals analyst at banking giant HSBC, "we believe the Fed's statement is bullish for Gold Prices .

"While accepting the uncertainty surrounding inflation, the Fed has yet to raise rates."

Despite the Fed's continued "tough talk", the Dollar fell this morning to a one-month low vs. the British Pound at $1.9840 after the UK 's chief central banker, Mervyn King, also hinted at interest-rate rises ahead.

"Although inflation is rising now [at a 16-year record], we will ensure it falls back to target," he promised a parliamentary committee in London .

Yet the Bank of England has actually cut UK interest rates three times since Dec., however, hoping to defend the fast-falling housing market.

The US currency also slipped today to a 13-session low vs. the Euro at $1.5725 on news that growth in the Eurozone money supply hit 10.4% in May.

Founded 10 years ago – and only today closing public tenders to construct its long-awaited premises in Frankfurt , Germany – the European Central Bank has quietly abandoned its money-supply target of 4.5% per year.

The latest surge in European credit growth was led by a jump of more than one-fifth in new issues of short-term debt.

"This news will do little to dilute the ECB's concern over inflationary pressures," believes Howard Archer at the Global Insight research consultancy in London . "It reinforces the belief that the ECB will press ahead with a rate rise from 4.0% to 4.25% when it meets next Thursday."

But not waiting for Europe 's central bankers to defend the value of money, however, investors bid the Gold Price in Euros back above €570 per ounce to stand almost 19% higher from this time last year.

The Dax index of German equities meantime fell 1.9% to stand almost one-sixth lower from June 2007.

Fortis, the Dutch-Belgian bank, led a sharp drop in European financial stocks by saying it wants to raise €8.8 billion ($13.8bn) to shore up its balance sheet.

"A gloomy report from Albert Edwards, global strategist at Société Générale, said that equity markets could lose 70% of their value from the peaks of October last year," adds the Financial Times.

"If that prediction were to be realized, the FTSE100 [in London ] would fall to around 3,000."

On the data front, meantime, consumer prices in Saxony rose 3.4% in the year to June, the German state's statistics office said today. In Hesse , the official inflation rate rose to 3.8% annually, driven by a 61% jump in fuel prices.

"Energy costs make up one-third of the cost of Gold production," notes John Ing of broking and research firm Maison Placements in Toronto , Canada .

Whilst favoring Agnico-Eagle Mines and Kinross Gold Corp. for their current mine development work, "Gold Prices need to go higher to help justify the huge capital expenditures needed," Ing tells the Globe & Mail newspaper.

"Everybody calls prices going up 'inflation'," agrees Martin Murenbeeld, head of economics at the $2.9bn Dundee Wealth Management group. "But a lot of the prices going up are supply and demand signals."

"The US Federal Reserve...can just jawbone and hope food & energy doesn't work itself through the labor-force wage structure."

Wage inflation is already rising fast in South Africa 's mining industry, reports the latest Commodities Weekly from Standard Bank in Johannesburg .

The bank's precious metals team cite the "notable" supply-side event of Anglo Platinum – the world's No.1 platinum miner – giving its workers "a wage top-up to cope with the recent rise in South African inflation, now running at more than 10% per year.

"With inflation in South Africa in 2008 likely to be above the negotiated increase of 2007 for many mine workers, 2009 negotiations are likely to be tough," Standard Bank adds, "as labor unions are seeking maximum wage hikes in an environment where costs for miners are rising fast."

In South Africa today – where more than 200 people died in mine-working accidents in 2007 – the world's No.4 gold miner Gold Fields closed a shaft at the crucial Kloof site after two workers died following a tremor.

That brings the number of deaths at Gold Fields' local operations to 21 so far this year. The company didn't say how much production will be lost due to the closure.

The latest US Geological Survey says that 2007 saw South Africa overtaken by Australia as the world's No.1 gold producing nation.

Previous research from the GFMS consultancy based in London had put China in first place.

South African gold output has more than halved in the last decade; Australian output fell 7% in the year to June; the investment manager of Zijin Mining – China 's largest gold miner – has said that sharp growth in Chinese Gold mining could see its entire reserves depleted by 2014.

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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