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Gold Hits 5-Week High as ECB Admits to "Quantitative Easing"

Commodities / Gold & Silver 2009 May 07, 2009 - 08:45 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF PHYSICAL gold spiked to its highest level since the start of April in London trade on Thursday, jumping above $923 before slipping $7 per ounce as the forex, commodity and equity markets leapt on a move to "Quantitative Easing" by the European Central Bank (ECB).


Government bond prices fell, crude oil rose, and world stock markets further extended their run to new four-month highs.

"On the basis of increasing risk appetite and the falling VIX [volatility index]," says the Standard Bank team led by Walter de Wet in London, "arguably the Gold Price should be lower.

"However, with fears switching from the economic doom and gloom to the potential for a period of future inflationary pressure, commodities may well see additional support from the investment community over the coming months as an inflation hedge."

Cutting interest rates for the Eurozone's 350 million citizens to a new record low of 1.0% today, the ECB initially disappointed traders who forecast stronger monetary stimulus, with the Euro dropping 1.5¢ on the news.

But the single currency then surged, however, leaping towards fresh one-month highs above €1.34, as ECB chief Jean-Claude Trichet outlined plans for "enhanced credit support" – denying that it was Quantitative Easing, but admitting that it was merely a matter of "definition".

"We will conduct liquidity-providing longer-term refinancing operations with a maturity of 12 months," Trichet told reporters at today's post-decision press conference.

"The Governing Council has [also] decided in principle that the Eurosystem will purchase euro-denominated covered bonds issued in the euro area."

Full details won't be announced until the next ECB meeting on June 4th, but Trichet signaled that €60 billion will be set aside to buy covered bonds – a form of debt primarily used by German banks to raise finance.

The ECB has already doubled its holding of Euro-area financial assets to €10 trillion since the financial crisis began to break two years ago.

"Europe's central banks are $40 billion poorer than they might have been after they followed a British move 10 years ago this Thursday to shrink the Bank of England's gold reserves," notes the Financial Times today.

Selling gold to maintain its weighting in central-bank reserves, European policy-makers have now divested 3,800 tonnes of Gold Bullion from their vaults under the annual-cap agreements first signed in autumn 1999 and due to expire this coming September.

"As a result of the program, a one-off reduction in risk of approximately 30% was achieved," claimed the UK Treasury when asked by the Financial Times to defend the 400-tonne sales it announced on 7th May 1999 – a move which drove Gold Prices down to 20-year lows and marked the very start of this decade's bull market.

The Swiss National Bank, which began selling 1,550 tonnes 10 years ago, declined to comment.

Today the Gold Price in Euros fell hard as the single currency rose, dropping 1.4% from this morning's eight-session high of €695 an ounce.

Across the Channel in London, meantime, the Bank of England held its key interest rate at 0.5% – some 2.4% below the rate of inflation – and declared that it sees "promising signs that the pace of decline [in the economy] has begun to moderate."

Nevertheless, the Old Lady also expanded her own "asset purchase" program by two-thirds to £125 billion ($187bn), financed by "the issuance of central-bank reserves" – otherwise known as money creation.

Ten- and 20-year UK gilt yields rose sharply, however, hitting 3.71% and 4.48% respectively and unwinding all of the Bank's "quantitative easing" of longer-term interest rates when it first announced the policy in early March.

UK investors now Ready to Buy Gold saw the price move 4.0% higher from last Friday's low, touching £615 an ounce.

So-called "safe haven" US Treasuries fell alongside UK debt, meantime, pushing yields sharply higher to reaching 3.24% and 4.15% on the 10- and 30-year bond respectively – their highest levels since November – even as General Motors announced a $6 billion loss for the first quarter, burning $10bn in cash as sales and income sank.

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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