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Bailouts and Low Interest Rates to Inflate Gold Price Bubble

Commodities / Gold & Silver 2009 Jan 29, 2009 - 08:21 AM GMT

By: Adrian_Ash

Commodities Best Financial Markets Analysis ArticleTHE PRICE OF WHOLESALE gold bullion slipped to a four-session low early in London on Thursday, dropping more than 4% from Monday's 3-month high to bounce off $875 an ounce.

Crude oil meantime slid back towards $41 per barrel, and European stocks stood 1.2% lower on average by lunchtime in Paris, where hundreds of thousands of workers and students joined street demonstrations to "sound a cry of anger" at the global financial crisis.

The US Dollar was volatile but held flat overall vs. the Euro and Sterling, pushing the Gold Price for European and UK investors down to one-week lows of €662 and £613 an ounce respectively.

"Combined with an aggressive fiscal policy, it is clear that the authorities are going 'all-in' to try to mitigate the near-term effects of the economic collapse," says David Einhorn, head of the Greenlight Capital hedge fund whose short-selling of Lehman Bros.' stock in 2008 failed to prevent his fund losing 23%.

"Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed. Our instinct is that gold will do well either way.

"Deflation will lead to further steps to debase the currency, while inflation speaks for itself."

Telling clients that Greenlight has just taken positions in Gold Bullion as well as Gold Futures and mining stocks, "To everyone's dismay, we believe that some of Grandpa Ben's predictions are playing out," he adds – referring to his grandfather's "gold bug" faith in the metal during the long bear market of 1980-2000.

"I think gold is rising because of fiscal deterioration and the prospect that the US [Treasury's debt] may be downgraded," says Tom Sowanick at the $22 billion Clearbrook Financial funds in Princeton, New Jersey.

"They are printing trillions of dollars worth of currencies," agrees Robert Lutts of the $400 million Cabot Money funds in Massachusetts, also speaking to Bloomberg, "and there is no real asset behind it.

"So every single Dollar in my pocket is going to be worth less and less every day."

Following Wednesday's US approval of President Obama's $825 billlion stimulus package – as well the Federal Reserve's vote to begin Quantitative Easing – new Treasury secretary Tim Geithner said overnight that he's working on a fresh plan to "repair the financial system," but refused to give details.

Unnamed Treasury sources tell the Wall Street Journal that the plans will cost between $1-2 trillion.

Clearbrook's Sowanick now sees the top of this bull market in gold reaching $1,700 an ounce.

Short-term, today's Gold Market note from Standard Bank in Johannesburg pegs "primary support" at $877, with resistance at $893.

"Inevitably, low interest rates lead to a gold bubble," says David North, head of asset allocation at the UK's No.1 institutional investor, Legal & General.

The company's $500m offshore and onshore hedge funds now hold one-third of their value-at-risk in gold, he tells the Financial Times .

Minnow hedge fund Osmium Capital Management – running some $178m from Bermuda – today launched a new class of shares denominated in gold rather than Dollars or any other official currency because "those currencies are clearly deteriorating with governments assuming more debt and having lower revenue and more expenditure," according to the chief executive.

But while Western funds continue turning to Gold Investment , Indian gold consumers – the world's largest single source of physical gold demand – slashed imports by more than 90% to just 1.2 tonnes this month, the Bombay Bullion Association said earlier today.

"Banks have a lot of carryover stocks from December and also November," said BBA president Suresh Hundia to Reuters this morning.

"That's why imports were less. Prices were also high" above new record highs of 14,000 Rupees per 10 grams.

On the supply side of the Gold Investment market today, world No.4 miner Gold Fields reported a 5% rise in output for the last 3 months of 2008, but said it will this quarter's target of one-million ounces thanks to lower copper production from its Cerro Corona gold and copper mine in Peru.

World No.1 Gold Miner Barrick Gold said today it's put its Kainantu project in Papua New Guinea onto "care and maintenance".

Newmont Mining, the world's No.2 gold producer, said it's raised $1.56bn to help fund its purchase of the Boddington Mine in Australia from AngloGold Ashanti.

Developing the Boddington site will cost an estimated $2.6bn, with Newmont targeting up to 5.5 million ounces of output once full production begins next year at cash-costs of $440 per ounce.

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 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.

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David Fredin
30 Jan 09, 09:28
We don´t see deflation in Mexico

Mr. Ash,

About all this deflation concerns, Be asured that what we are looking at, in many countries, is strong inflation. May be due to the huge dollar rally of the past months. However this event, though maybe transitory, is taking inflation here to two digits. we are alarmed.

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