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Gold Surges Ahead of Record US Treasury-Bond Sale and China Forex Reserves Warning

Commodities / Gold & Silver 2009 Feb 11, 2009 - 10:06 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE of physical gold bullion touched an 8-session high early in London on Wednesday, turning lower from $927.50 an ounce as world stock markets slipped following Wall Street's shock 5% slump overnight.

Treasury-bond prices rose despite a record $21 billion auction of new 10-year notes due today, while crude oil slipped below $38 per barrel.


The Bank of England said in its latest quarterly Inflation Report that the UK economy is now in "a deep recession."

Business confidence across the 16-nation Eurozone worsened for the 18-month running in Dec. according to the Ifo Institute in Munich, falling to the survey's lowest reading since it began in 1993.

"We have to be cautious on gold short term," says Phil Smith in his latest technical chart analysis for Reuters India.

"The near term signals are still bullish but are looking like they may turn. Overall still a bullish chart, but with near-term downside risk."

On the currency markets today, the Dollar gave back a little of Tuesday's sharp gains, but the "safe haven" bid kept British Pounds six cents below yesterday's high of $1.4950.

The Euro rose above $1.2930, capping the Gold Price in Euros beneath €717 an ounce.

For British investors and savers now Ready to Buy  Gold , the price rose to a 7-session high of £645.

"Technical momentum signals are warning of further upside potential for the greenback," says Manqoba Madinane in his Gold Market note for Standard Bank in Johannesburg.

"That could keep precious metals drifting sideways as forex market uncertainty keeps the investment climate uncertain."

Here in London today, Bank of England governor Mervyn King promised that Quantitative Easing to boost the money supply would "work eventually" in curing the current deep and long-lasting recession.

"With the full range of instruments at its disposal," he told a press conference, "the Monetary Policy Committee can and will take action to return inflation to the [2%] target and so ensure that economic growth will again match its potential.

Ahead of buying £50 billion ($72bn) of toxic assets from the UK's ailing banks this week, "That is likely to include actions aimed at increasing the supply of money to stimulate nominal spending," King added.

This morning in Stockholm, the world's oldest central bank – the Swedish Riksbank, founded in 1668 – slashed its key interest rate, matching the Bank of England's own 3-century historic low at 1.0%.

Europe's leading auto-makers went to Brussels meantime, demanding €15 billion ($19bn) in emergency aid from EU commissioners.

In Washington, US lawmakers continued to wrangle over $40bn of President Obama's $838bn stimulus package – just part of the near-$3 trillion of fresh government and central-bank spending promised by American administrators on Tuesday.

"There's a lot of investor anxiety out there and people are turning to gold for its perceived safety," said Matt Zeman at Chicago brokers LaSalle Futures Group to Bloomberg late Tuesday.

"With all the money the government is planning to spend or print, at some point in the future, we're going to hit the inflationary wall."

Longer-term, a Gold Price of $2,300 an ounce "would not be surprising" claimed Ralph Aidis, portfolio manager at US Global Investors, to the Mining Indaba conference in Cape Town, Johannesburg today.

"The dramatic correction has delayed but not destroyed the 20-year commodity cycle," Aidis is quoted by Miningweekly.com, adding that historical patterns suggest the global recession may now have only 5 months left to run.

Meantime "The investor community is still flooding into the Gold Market ," says London dealer Mitsui in its client note this morning, "with over 400,000 ounces added to the SPDR Gold ETF fund in New York yesterday."

Mitsui also cites a Bloomberg story quoting former advisor to the People's Bank of China, Yu Yongding, who says China "should diversify its reserves away from US Treasuries.

"The value of China's foreign-exchange reserves is in danger of being inflated away by the US government's pump-priming," the ex-official says.

Gold Bullion currently accounts for less than 1% of China's officially-stated foreign currency reserves. So "Surely it must be somewhere on their minds," says Mitsui.

"Given the state of the world's economy and credit markets, it is likely that outstanding loans [by the International Monetary Fund] will rise," says a note from Virtual Metals here in London, also looking at Central Bank Gold in 2009 .

"Further boosting the fund's annual income," the VM consultancy says, these loans mean potential sales of 400 tonnes of IMF gold – mooted last year to help cover its huge budget shortfall – "could be put on the back burner.

"At the very least, the IMF's renewed [political] relevance has strengthened the case of those who oppose such sales."

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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