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Gold "A Buying Opportunity" as Europe's Central Banks Turn to Inflation

Commodities / Gold & Silver 2009 Mar 05, 2009 - 05:58 AM GMT

By: Adrian_Ash

Commodities THE SPOT PRICE of physical gold held steady in Asia and London on Thursday morning, moving in a tight $2 range either side of $912 per ounce as traders waited for key interest-rate decisions from the Bank of England and European Central Bank (ECB).

European equity markets sank into the red once again – unwinding one-third of Wednesday's sharp bounce – after Germany reported a 1.3% drop in retail sales for Jan. and the UK's Halifax bank reported a 2.3% drop in house prices for Feb.

The Euro slipped one cent to the Dollar on the foreign exchanges. The Gold Price in Euros recovered to €726 an ounce, down 8% from last month's new record highs but 14% higher for 2009 to date.

"Gold is really a buying opportunity," reckoned one Dresdner Bank analyst speaking to Bloomberg this morning.

"Uncertainty remains in the market, especially from equities. [ Gold Investment ] is still favorable over bonds and equities at these levels."

The ECB was today expected to abandon its "inflation vigilance" by cutting Eurozone rates towards the latest reading of Consumer Prices rises at 1.2%.

Here in London, the UK central bank looked set to slash its lending rate to 0.5% – a new all-time record low – and also step into the unknown by taking what it's called "unconventional measures" to stem the deflation in asset prices amid the fastest economic decline since 1981.

Quantitative Easing means "buying up assets," as the BBC explains, "usually financial assets such as government and corporate bonds, using money it has simply created out of thin air."

Even before this "money printing", however, the UK money supply grew by £48 billion ($68bn) in Jan. this year, swelling by 17.5% from 12 months before.

The gap between how much money exists as Pounds Sterling and how much is now owed by UK households and business swelled faster still, surging by more than one-third from Jan. 2008.

According to Bank of England data, the total volume of M4 outstanding (meaning all notes & coins in circulation, plus bank deposits and short-term "near cash" bonds) lagged the volume of private sector debts outstanding by £434 billion.

That's fully 34% of the UK's annual economic output.

"Low rates and quantitative easing could threaten the Pound if the Bank of England plays fast and loose with future inflation," says Steven Barrow in his currency note for Standard Bank today.

"For this reason, it needs to give itself a disincentive to create unanticipated inflation. This it can do by aiming its gilt purchases at the long end of the curve, not the short end."

The open-market currently lacked much appetite for long-dated gilts early Thursday, piling instead into short-dated bonds and forcing the yield on 6-month gilts down to 1.30% ahead of the Old Lady's announcement at midday in London.

The Gold Price in Sterling rose back towards £645 an ounce, down nearly 8% from last month's record high at £700 but higher by one-half since the Bank of England began slashing UK interest rates in late-summer '08.

Wednesday's auction of £2.25 billion in new 30-year UK bonds was "the worst in more than 10 years in terms of demand," according to RBS research head Roger Brown.

Bidding for less than 1.5 times the gilts on offer, yesterday's buyers demanded an annual yield of nearly 4.50%, well above the Treasury's offer of 4.25%.

Across the Channel, "Current conditions for [French] Treasury bills are very favorable," claims Philippe Mills, head of Agence France Tresor, "because we keep beating historical records every auction."

Adding €17 billion to the already wider-than-forecast net issuance needed to finance the French state in 2009, he told journalists Wednesday that the bond market will happily swallow an extra €155bn in medium and long-dated bonds from the Paris government.

Overall however, "Bond issuance in the Eurozone this year is forecast to rise to a record €870bn," as the Financial Times notes today, "a 33% increase on last year, according to Barclays Capital."

Meantime in China, premier Wen Jiabao told the National People's Congress in Beijing today that he expects the economy to grow 8% this year.

Wen failed to announce any new stimulus spending on top of the $500bn already announced.

Crude oil slumped almost 2% on the news, while copper prices also ticked down but remained more than one-fifth higher for 2009 to date.

Over in Venezuela today, president Hugo Chavez confirmed the state seizure of American food producer Cargill's local facilities, saying it would cut prices to consumers.

"I warn you this revolution means business," says Chavez.

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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