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Gold New Record Highs as All Major Currencies are Vulnerable

Commodities / Gold and Silver 2011 May 24, 2011 - 12:38 PM GMT

By: Ben_Traynor


Best Financial Markets Analysis ArticleU.S. DOLLAR gold prices hit $1523 – their highest level for two weeks – on Tuesday morning London time, while stocks and commodities traded flat. 

Gold prices in the Euro and Pound Sterling, meantime, set record highs – €1078.85 and £942.22 per ounce respectively – at Tuesday morning's London Fix.

The US Dollar ticked lower after a Federal Reserve official suggested the Fed may continue with loose monetary policy for an extended period.

"Overall, gold is benefitting again from currency risk, and is expected to out-perform silver," says one London-based bullion dealer.

Gold and silver prices "were basically a reflection of foreign exchange and equity markets" in early trading Tuesday, according to a dealer in Hong Kong, who described the action in Asia as "lethargic".

Silver prices climbed one Dollar to $36 an ounce Tuesday morning – still 27% off last month's all-time high – before slipping back slightly.

The US Federal Reserve will consider keeping interest rates "on hold" for an "extended period" to give the Fed "more time to assess economic conditions" when its latest round of stimulus measures ends next month, Federal Reserve Bank of St. Louis president James Bullard said on Monday.

"Fed policy is determined by inflation and unemployment in the United States," wrote Christina Romer, former economic adviser to President Obama, in the New York Times at the weekend.

"But if Mr. Bernanke could discuss the exchange rate openly, he would probably tell you that one way any monetary expansion helps a distressed economy is by weakening the Dollar," added Romer, arguing that a weaker Dollar would boost US exports. 

"Given the desperate need for jobs...we are almost surely better off with a weaker Dollar for a while."

Across the Atlantic, ratings agency Moody warned Tuesday that a Greek sovereign debt default "would have implications for the creditworthiness of [government bond] issuers across Europe."

"If there were to be a Greek default there could potentially be multi-notch downgrades to the weakest sovereigns," Alastair Wilson, chief credit officer for Europe, Middle East and Africa at ratings agency Moody, told Reuters on Tuesday.

Standard & Poor's and Fitch, the two other major ratings agencies, have both cut their ratings for Greek debt within the last month.
"The Euro may not stop falling until European policymakers come up with a more reassuring stance on debt problems," reckons Ayako Sera, Tokyo-based market economist at Sumitomo Trust and Banking.

"The huge storm of risk reduction will rip through markets if the focus turns to Spain and Italy. It's clear they don't have money to bail out these countries."

At the policy level meantime, the contest to replace Dominique Strauss-Kahn as head of the International Monetary Fund got its first official entrant on Tuesday when Mexico nominated its central bank governor Agustin Carstens.

"While emerging markets representation has been strengthened in global economic decision making, it is imperative that they have a stronger voice," said Carstens, who oversaw the Banco de Mexico's purchase of 93.3 tonnes of gold bullion earlier this year. 

French finance minister Christine Lagarde remains favorite to get the job.

"There's not that much to choose between the Euro and the Dollar in our view," writes Standard Bank currency strategist Steve Barrow in a note to clients. "Both look vulnerable for different reasons."

New industrial orders in the Eurozone fell by 1.8% March – a bigger drop than economists expected – according to data released Tuesday by Eurostat, the European Union's statistics office.

"Not only are the sovereign-debt concerns weighing on the Euro, there's the additional headache of weaker data now which is adding to the selling pressure," says Mike Jones, currency strategist at Bank of New Zealand in Wellington.

"The Euro is not yet a buy," adds Manuel Oliveri, Zurich-based currency analyst at UBS.

Elsewhere in Europe, Moody's is considering downgrading the debt of 14 UK financial institutions – including Lloyds and the Royal Bank of Scotland – it said on Tuesday, citing their increased credit risk in the event of a withdrawal of state support.  

"Given the stresses on the economy, [Moody's announcement is] just another difficulty for the UK to tackle and [the Pound] Sterling will remain under pressure," says Jane Foley, London-based senior currency strategist at Rabobank International.

By Ben Traynor

Gold price chart, no delay   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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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