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Gold Firm on Inflation Spurt

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

By: Adrian_Ash

Commodities

SPOT GOLD PRICES recovered one-half of an early 1.5% dip in London on Wednesday, trading $5 below Asia's four-session high of $818 per ounce as crude oil rose together with US stock futures.

The Euro dropped a cent to the Dollar and the British Pound slipped almost 1.5¢.


The Shanghai stock market closed more than 7% higher – its best one-day gain in four months – on rumors of a post-Olympics stimulus package worth $58 billion.

"With developed market equity markets struggling to achieve consistent gains," notes Manqoba Madinane for Standard Bank, "crude oil volatility – coupled with currency market uncertainty – should focus investors' attention on precious metal market developments."

Government bond yields held flat this morning, but "investment grade credit spreads have widened," he adds.

In the US mortgage market – where loan applications fell 1.5% last week according to new data from the MBA, down by one-third from mid-Aug. '07 – the average 30-year loan now costs 2.8% above benchmark US Treasury bond yields.

"The spread had been about 1.8 percentage points," says Greg McBride, senior analyst at BankRate.com, to MarketWatch.

"For at least the next few years, we're in a world of wider credit spreads. Even once the credit crunch finally gets put to bed, that trend will not reverse itself overnight."

Here in the United Kingdom , gross mortgage lending rose 5% last month from June's record low, said the Council of Mortgage Lenders today.

Total credit creation, meantime, slowed by one-third from June's all-time record of £51 billion ($95bn), but July still took the six-monthly average of new private-sector debt to a fresh record – twice the level of three years ago.

The inflationary spurt came even as "labor demand softened...investment intentions declined [and] there was a further pronounced deceleration in construction and services output," according to today's Business Conditions Survey from the Bank of England.

Across the Atlantic , "millions of Americans are already suffering" from higher inflation and a slowing economy, says today's editorial in the New York Times .

"We fear millions more will be hurt before this crisis ends. They cannot wait until after the election for help."

The newspaper calls for Congress to fast-track $4 billion in state and city grants to buy up empty homes, and also to "start crafting the next stimulus bill" straight away, focusing on food stamps and infrastructure projects "like repairing bridges and roads" instead of tax rebates.

The NY Times doesn't mention US interest rates, but the political block against reversing the current 3.6% negative yield on cash savings remains clear.

Back in the Gold Market , meantime, "physical demand is robust," says Afshin Nabavi at Swiss refining group MKS, speaking to Bloomberg today.

"We've not seen this level of demand for some time."

Patrick A. Heller, a US coin dealer, writes at Liberty Coin Service how the current surge in private-investor demand means "premiums have jumped significantly" as the Gold Price fell 20% from mid-July.

"Both the American Eagle and South Africa Krugerrand premiums have jumped about 2% relative to gold in just the past week. Canada one-ounce gold Maple Leafs are up about 1%.

"Purchasers of such coins may have to wait three to five weeks before the coins are available to fill their orders." ( Prefer not to wait? Rather not pay a premium? Want the same security enjoyed by the world's largest gold bullion traders? Learn more at BullionVault now... )

India gold demand has also leapt on the recent low prices. It accounted for 20% of total world gold sales last year.

"Indian jewelers are paying gold importers more than double last month's premiums," reports Reuters from New Delhi, "as they scramble to meet a resurgence in demand stoked by...the approach of the Diwali festive season [in late October]."

Dealers say the premium paid to India 's gold importers have reached $1.80 per kilo, up from 80-85 cents last month.

" Gold imports this month will be close to 50 tonnes," reckons Harish Galipelli at local brokers Karvy Comtrade.

One gold dealer interviewed by Reuters in Chennai says imports could rise even further, overtaking last year's best monthly total of 79 tonnes.

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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