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Gold Falls Despite US Fed and ECB Vow to Inflate Out of Recession

Commodities / Gold & Silver 2009 Jan 05, 2009 - 08:53 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE OF WHOLESALE GOLD slipped for the second session running on Monday, starting New York's first serious trading day of 2009 down 3.3% as Asian stock markets closed sharply higher.

The US Dollar knocked the Euro 3¢ lower on the forex market while Gold Prices fell to a six-session low.

Short-dated US bonds gained but longer-term Treasuries fell. Crude oil rose almost 2% to break above $47 per barrel. The stock-market rally faded in Europe, leaving the FTSE100 here in London flat.

"Gold is being hurt by the firmer Dollar and gains in oil prices are capped," reckons Shuji Sugata at Mitsubishi Corp. Futures & Securities in Tokyo, speaking to Reuters.

"The downside is firmly underpinned [however] as the conflict in the Middle East looks to have no easy way of being settled."

As Israel continued its ground assault across Gaza right up to the Egyptian border, Tokyo Gold Futures ended their first trading day of 2009 some 0.8% higher against the Japanese Yen.

The AM London Gold Fix was then set at $860 an ounce, almost $15 below Friday's PM fix and 1.3% below the average price of 2008.

"There is a strong seller evident at the $885-$890 level," writes Dennis Gartman in the eponymous (and highly-priced) Gartman Letter, quoted by the Financial Times .

"Until that seller has been sated we shall not add to our [modest] long position," says Gartman, guessing that "It is a long standing order from one or several of the 'legacy' central banks in Europe who've been quiet, but steady, sellers of gold under the Washington Agreement."

Due to expire in Sept. 2009, the current Central Bank Gold Agreement caps gold sales by its 15 member nations at 500 tonnes per year.

Looking ahead to Gold in 2009 , any gold sales by the International Monetary Fund (IMF) would likely come within the agreed limit, dampening their impact on the market.

Central bank gold sales totaled 357 tonnes in the year-ending Sept. '08 according to independent analysis from the World Gold Council (WGC) – just shy of $10 billion-worth.

Private investors meantime pulled a net $320 billion out of equity and bond funds worldwide, says new data from Emerging Portfolio Funds Research.

Judged as a percentage of global stocks and bonds, all the Gold Bullion ever mined in history rose from 4% to 7% of investable paper. It hasn't been this strongly-weighted since 1994.

But with the market still so small compared to more heavily-promoted financial investments, "It only takes a tiny inflow of liquidity in the markets to make gold shine," as Yuki Sonoda at Daiichi Commodities in Tokyo tells Reuters today. ( See Gold as a Percentage of Paper Assets here... )

On the supply-and-demand front this morning, the world's No.1 Gold Mining nation – China – reported output growth of 2.1% for the first 11 months of 2008.

Gold imports to India, meantime – the world's hungriest gold consumer market – fell 47% from the record level of 2007 to reach 402 tonnes, with the Bombay Bullion Association blaming last year's rising Gold Price and the slowing economy.

On the other side of the trade, "Inflation will not be allowed to fall significantly below 2% for a protracted period of time," said Lucas Papademos – vice president of the European Central Bank (ECB) – in an interview yesterday.

"We will do what is necessary, in terms of the timing and in terms of the size [of interest-rate cuts] to ensure that."

And again in the US, "The financial and economic firestorm we face today poses a serious risk of an extended period of stagnation," says Janet Yellen, president of the San Francisco Federal Reserve Bank – "a very grim outcome."

Promising to avoid deflation at all costs, "As the nation's central bank, the Fed can issue as much currency and bank reserves as required," she told the American Economics Association on Sunday.

"I'm [also] strongly supportive of a substantial fiscal stimulus package," she added.

Press reports this morning say US president-elect Barack Obama – due to take office two weeks tomorrow – is preparing a package of $310 billion in tax cuts.

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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