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Global Recession Worsens as G7 Ignores Currency Volatility

Commodities / Gold & Silver 2009 Feb 16, 2009 - 08:17 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF physical gold held in a tight $8 range early Monday, trading either side of $941 an ounce as world stock markets fell for the fifth session in six.

Crude oil ticked lower from Friday's spike to $38 per barrel, while Opec members Qatar and Venezuela both said they want further output cuts.

European and UK government bond prices rose, meantime, pushing 10-year German bund yields back towards December's record low beneath 3.0%.

"The weekend G7 meeting [of political and finance leaders in Rome] failed to produce any new initiatives of note, but that was to be expected," says Steven Barrow for Standard Bank in London.

The G7 summit made no mention of the vicious currency volatility hitting investors and business worldwide, but it did pledge to avoid "protectionist" economic policies.

"Things are bound to be quiet today given the US [Presidents Day] holiday," Barrow adds, and although the volume of speculative money in the currency markets "swamps" the underlying demand from trade and investment flows, latest data show that "non-commercial positions are very light right now," he says – a point confirmed to BullionVault by professional traders in London's forex market.

This morning the Gold Price for Australian, Canadian, Eurozone, Swiss and UK investors held within 2% of last week's new record highs.

The Wall Street Journal reports that gold imports to India – the world's largest gold consumer market – have sunk to zero this month, as record-high Rupee prices spark a flood of old jewelry sales.

"Around 90% of India's jewelers are not purchasing gold from banks," says Pravin Mehta, head of the Madras Jewelers and Diamond Merchants Assoc., "as consumers are selling their old jewelry and asking jewelers to remold it, instead of buying new gold."

One Mumbai bullion trader forecasts a further 7% rise in Indian Gold Prices by mid-April "as economic concerns persist globally."

Indian gold owners saw the price increase by more than one quarter in 2008, rising for the 26th year in the last 38.

"Economic stimulus plans by governments around the world are likely to drive inflation, increasing demand for gold as a hedge," advises London bullion dealers Marex in a note today.

"Governments may continue spending until they see inflation."

Today the government of India suspended its fiscal deficit target, with new debt expected to reach 6% of the country's 2009 output versus the previous aim of just 2.5%.

Self-declared "21st century socialist" Hugo Chavez yesterday won a referendum allowing him to continue as president of Venezuela indefinitely.

The Tokyo government said Japan's economy shrank at its worst rate since the 1973 oil crisis at the tail-end of 2008, contracting by 12.7% annualized on a collapse in electronics exports.

Credit-rating agency Standard & Poor's said it may downgrade Ukraine from its current "B" status, making new government debt harder to sell after the country asked the International Monetary Fund (IMF) for an emergency $16.4 billion loan.

Hungary reported a drop of 20% in December's industrial output, while the Czech finance ministry said it will launch a $3.3 billion stimulus package.

Versus the Euro – which will not succumb to "overly aggressive reductions" in interest rates, according to European Central Bank executive Jürgen Stark – the Czech Koruna began the week at a 3-year low and the Polish Zloty fell to a 50-month low.

Here in London – where shareholders in Northern Rock last week lost their appeal for compensation after the failed mortgage-lender was nationalized – shares in Lloyds TSB whipped by more than 20% as both the bank and UK government denied a state takeover is imminent.

Triple-A rated Lloyds used government aid last Sept. to rescue HBOS, the UK's No.1 mortgage lender. On Friday it reported HBOS made a net £10 billion loss in 2008 ($14.3bn), sending Lloyds' stock to a new record low more than 95% below its top of early 2007.

"The nationalization stuff is complete tosh," said a Lloyds spokesman yesterday – a claim repeated on BBC radio this morning by Stephen Timms, financial secretary to the Treasury.

Back in precious metals, hedge funds and other large speculators playing the US Gold Futures and options market last week extended their "net long position" of bullish bets to its largest level since late July.

On the other side of the trade, commercial traders acting for refineries, mints, wholesalers and bullion banks cut their "bullish ratio" – measuring the number of bullish contracts as a proportion of their overall bets – below 30% for the first time since August.

A survey by Bloomberg News of 32 professional gold-bullion traders and analysts shows 26 forecasting a rising price this week, the newswire reports.

Five said to sell, the newswire reports, and the other was neutral.

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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