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Bank of England Begins Printing Money, Deflation Hits World's Top Exporters

Commodities / Gold & Silver 2009 Mar 11, 2009 - 10:09 AM GMT

By: Adrian_Ash

Commodities

THE SPOT PRICE OF physical gold bounced around $900 an ounce early Wednesday in London, recording an AM Gold Fix almost 4% below last week's finish as world stock markets continued Wall Street's best rally so far in 2009.

Tokyo stocks added 4.5% from their recent 26-year low, while Germany's Dax rose 7.5% for the week.


The Dollar weakened on the currency market, while crude oil fell sharply, back below $45 per barrel of US sweet-n-light.

Government bonds rallied from Tuesday's sell-off, pushing the 10-year US Treasury yield back below 3.0%.

"I think gold, like other commodities, is going to be volatile in the near term," said Aaron Regent, CEO of world No.1 Gold Miner Barrick Mining, at the Reuters Global Mining & Steel Summit on Tuesday.

Looking further ahead, however, "As an industry, we will continue to be challenged not only to maintain our supply, but the trend of mine production decline is expected to continue the next 3 or 4 years," he added.

Latest data from the Metals Economics Group says all non-ferrous exploration budgets worldwide rose by almost one-sixth in 2008, but gold exploration fell to 39% of that spend – the lowest proportion on MEG's data.

World Gold Mining supply meanwhile slipped further, according to the Yellow Book of gold-market analysis from Virtual Metals in London.

Annual gold output shrank 2.3% last year and will fall again in 2009 to a multi-decade low of 2,295 tonnes, the consultancy predicts.

"The risk [for Gold Prices] is on the upside, it's not on the downside," reckons Peter Hambro, CEO of the unhedged, eponymous gold miner – listed in London and producing half-a-million ounces per year in Russia – at the same Reuters conference Tuesday.

"To protect yourself, there is no alternative to holding gold. I wish I could be more positive [about finance and banking]...but I am scared about the whole world at the moment."

Today in London, the Bank of England began its £150bn ($200bn) program of " Quantitative Easing ", buying UK government bonds with newly-created cash in a bid to boost credit and lending by private institutions.

Calling it "the Great British Experiment", BBC reporter Robert Peston says the Bank of England "wants the bulk of its purchases to come from non-bank financial institutions, such as pension funds and insurers.

"But in an extreme case, where pension funds are terrified of taking risks, the [new] money could simply sit in the banks, doing nothing. [Because] banks are still engaged in the vicious process of reducing their excessive exposure to other banks and financial institutions, and the new money injected by the Bank of England may be totally absorbed by that so-called deleveraging."

Conversely, Peston goes on, and assuming "that at some point the new money starts to do its job...well, interest rates would rise...and a 30% fall in the price of government bonds would not be out of the question.

"That would generate an eye-watering loss for the Bank of England.

Back in the London gold market, reports of "icebergs" from several dealers – meaning large orders that hide still-larger sales spread out in chunks across the market – were shown not to be from the major exchange-traded gold funds.

The main US Gold ETF – the SPDR listed in New York – said it ended the day with no change to its net assets of 1,029 tonnes of gold.

This volume of gold, used to back the trust-beneficiaries' shares, has now held steady since swelling by one-third in the eight weeks to Feb. 18th.

The daily shrinkage in net-asset value per share, meantime – deducted at a rate of 0.4% annually to cover storage and administration fees – has now reduced the gold backing each SPDR unit to 9.83% of an ounce from the full 10% backing at the 2004 launch.

Shares in Australia's GOLD exchange-traded gold fund – the world's first Gold ETF , launched six years ago at the end of this month – are now backed by 9.80% of an ounce, but continue to trade on the ASX market as a full 1/10th of an ounce.

"Gold may weaken further if the equity rally holds," says James Steel, analyst at HSBC Securities.

"The combination of an increase in investor risk appetite and a recovery in the financial markets undermine Gold Prices ."

New economic data released Wednesday showed the UK economy contracting by 1.8% annualized in February, while new investment lending in Australia shrank almost 4% from the month before.

Factory gate prices in Germany fell 1.2% month-on-month in January – way ahead of the 0.1% drop expected – while new orders sank by a near-record 38% year-on-year.

Japanese auto-maker Toyota said it will cut the wages it pays UK workers by 10% in a bid to avoid lay-offs.

Chinese exports sank in Feb. at a record rate of 25.7% year-on-year.

"It was indeed lower interest rates that spawned the speculative euphoria," writes former Federal Reserve chairman Alan Greenspan in the Wall Street Journal today.

With alleged Ponzi-scheme crook Bernie Madoff set to enter a guilty plea on 11 counts of fraud, however, "The interest rate that mattered was not the federal-funds rate," the former Maestro goes on.

"Home mortgage rates led US home price change," Greenspan claims, noting yet again the "decoupling" – or what in 2005 he called a "conundrum" – between central-bank interest rates and longer-term free-market rates.

Bloomberg today reports how the gap between interbank and overnight lending rates has soared again, reflecting "bank reluctance to lend", to more than 10 times its average of 2001-2007.

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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