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Inflationary Economic Stimuli Bullish for Gold Prices

Commodities / Gold & Silver 2009 Apr 08, 2009 - 07:29 AM GMT

By: Adrian_Ash


THE PRICE OF PHYSICAL GOLD pushed higher as world equities fell early Wednesday, rising above last week's close against both the Euro and British Pound.

Recovering all but $5 of Monday's sharp $30 drop for US investors, the Gold Price then dropped back to $883 an ounce.

Crude oil slipped below $48 per barrel, while government bond prices rose, taking 10-year US Treasury yields back down to 2.88% per year.

"Investors will drive the next leg of this bull market in gold, setting a new high above $1,000 in 2009 and with a real possibility of $1,100 per ounce," said Philip Klapwijk, chairman of GFMS, at the independent consultancy's Gold Survey launch here in London yesterday.

"We have seen people in Europe Buying Gold in quantities more typical of the Middle East and Asia...particularly in Germany and Switzerland.

"Inflation is the inevitable consequence of today's rapid money-supply growth and quantitative easing. It's extremely powerful medicine for Gold Investment ."

Today Richard Fisher, president of the Dallas Federal Reserve, told a conference in Tokyo that the US central bank is "duty bound to apply every tool" to avoiding deflation in the economy.

A source close to General Motors told the Reuters news-wire that the US auto-maker is about to declare bankruptcy, while German chancellor Angela Merkel extended to €5 billion a subsidy for consumers buying new, fuel-efficient cars.

The Wall Street Journal said that "Troubled Asset" cash relief will be extended by the Federal Reserve to US life insurance companies, sparking a sharp rally in their stock prices.

"We still see systemic risk in the financial system," wrote Walter de Wet for Standard Bank's precious metals note this morning, because "while the stimulus packages announced [at the G20 summit] last week should assist global growth, we doubt it can cure the problems entrenched in the financial system."

Attributing gold's failure to hold above $1,000 in Feb. to the "astounding" flow of scrap metal, however, GFMS's Klapwijk said at Tuesday's conference that recycled tonnage in the first three months of 2009 actually overtook new jewelry fabrication demand worldwide.

In full-year 2008, scrap-metal flows rose 27% to more than 1,200 tonnes, surging again to reach 500 tonnes in Q1 2009.

New jewelry demand, meantime, halved to just 420 tonnes, and traditional importers – such as world No.2, Turkey – have now become gold exporters, Klapwijk explained.

In the industrialized West, high-margin operations such as Cash4Gold – whose advert during this year's Superbowl featured late-80s rap star MC Hammer – have made selling gold easier for cash-strapped consumers.

One attendee put the flow of scrap metal far higher than GFMS's figure, dwarfing world mining output at perhaps 1,000 tonnes during the first quarter alone. Gold-market historian Timothy Green said India last failed to import gold during the Great Depression of the 1930s.

The sharp drop in Gold Prices during the third-quarter of 2008 actually saw global jewelry demand surge, however, and "Gold would have fallen to $650 or lower" without that pick-up, GFMS believes.

But it's also "a concern for the stability" of Gold Prices , Klapwijk went on, that for the first time in many years de-hedging by Gold Mining companies "will be running at trivial levels" in 2009.

Major gold miners sold forward a total 3,420 tonnes of their future production by the end of the 1990s, locking in current prices for fear of further falls as gold's two-decade bear market wore on.

Reducing that "hedge book" by Buying Gold on the open market as prices tripled and more this decade, however, the outstanding total now owing sits below 485 tonnes – "well below the mid-1990s level," according to GFMS.

That means "De-hedging is on its last legs as a source of demand," said Philip Klapwijk on Tuesday.

Over on the currency markets, meantime, the Euro today fell yet again vs. the Dollar, sliding to a new one-week low of $1.3150 after Germany reported a sharper-than-expected drop in Factory Orders for February – down 38% from the same month last year.

Sterling also continued its rally against the single currency, hitting 5-week highs against the Euro on news that High Street price inflation, as reported by the British Retail Consortium, hit 2.0% last month.

The BRC blamed the rise on "the pass-through of Sterling's depreciation to consumer prices."

On a trade-weighted basis, the British Pound has now suffered its sharpest devaluation since the end of the Gold Standard in autumn 1931, losing almost one-third since this time in 2008.

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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