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Gold Jumps to New Euro & Sterling Highs due to Government Debt Risk Issues

Commodities / Gold & Silver 2009 Jan 23, 2009 - 06:50 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD BULLION leapt to a 3-week high at the London opening on Friday, while world stock markets fell for the 11th time in sixteen sessions this month.

The US Dollar also continued to gain, reaching a 6-week high vs. the Euro and fresh 23-year highs vs. the Pound.


Hitting an AM Gold Fix of $873 an ounce, bullion broke £644 for UK investors and €681 for European gold buyers – both new all-time records.

US government-bond prices ticked higher, but stayed on track for their worst weekly performance in 3 months.

"The [current] lack of flow and liquidity in the Gold Market means that a million ounces of inflows now is two or three times as significant as a few months ago," says UBS analyst John Reade, quoted by the Financial Times.

"While we are seeing little jewelry demand, this probably will not matter in the near term."

"Clearly there is investment money flooding in due to the perceived security of gold," agrees John Meyer, analyst at Fairfax investment bank in Mayfair, speaking to Reuters.

"The relationship between Gold and the US Dollar appears to be broken at present. Normally a stronger Dollar pushes down gold."

But while Gold Investment in the G7 economies continues to surge, however, "the temperature across the traditional physical [demand] hubs has cooled considerably," notes London-dealer Mitsui in its latest Refining Monitor.

"The level of optimism amongst the refining community is the lowest since June last year," Mitsui goes on, noting the 81% collapse in Indian Gold Imports during Dec.

Unlike investors, India's consumer gold market – the world's hungriest for physical gold – "not only shuns high prices but also volatile trading ranges," the Monitor says.

"There is no doubt that the investment arena is the driving force behind the direction of the current Gold Price ."

Global equities today shed 1.2% on the MSCI World Index, and European stocks fell to a fresh 5-year low on the Stoxx 600 index, after consumer electronics giant Samsung posted its first-ever quarterly loss, knocking the stock more than 4% lower.

Ahead of the Wall Street open, General Electric reported a 43% drop in its quarterly profits, and the Harley-Davidson motor-cycle manufacturer – often taken as a bellwether of "Baby Boomer" discretionary spending – said it will cut 1,100 jobs by 2011 after posting a 59% drop in profits.

Over on the government bond market, meantime, short-dated yields fell but long-dated rates rose as expectations of yet more interest-rate cuts from European central banks jarred with fears of 2009's record debt issuance.

ING bank in London said France's "triple-A" credit rating may come under pressure due its "level of debt."

Goldman Sachs believes US Treasury borrowing in 2009 will now reach $2.5 trillion.

Over in Tokyo, "Investors are anxious to know if next week's auction of 20-year government bonds can draw decent demand," warns Masashi Shimominami at Mizuho Securities Co.

And here in London, Morgan Stanley said that future auctions of UK government gilts will become "meaningful risk events" for the value of Sterling, now trading at all-time record low on the foreign exchanges.

"Concerns center on whether the [UK] can attract the capital from external investors required to finance its burgeoning fiscal deficit," writes Ned Rumpeltin, currency strategist at Morgan Stanley.

New data today showed the UK economy shrinking at its fastest pace since 1980 during the last 3 months of last year – smaller by 1.5% against the 1.2% drop forecast by analysts.

The British Treasury's net deficit for 2009 is already pegged at £118 billion – more than 9% of GDP at current levels.

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 2009

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.

Adrian Ash Archive

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