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Gold & Euros Bounce on Inflation Fears; Ex-Fed Volcker Warns of Return to 1970s Stagflation

Commodities / Gold & Silver May 15, 2008 - 09:02 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES turned higher alongside the Euro early Thursday, gaining 0.5% after strong economic data dashed short-term hopes of Eurozone rate cuts.

That dented the US Dollar's recent rally and capped Western stock markets.


"[Wednesday's] US inflation statistics could give the Fed additional room for further easing," says Manqoba Madinane in today's Gold Market report from Standard Bank in Johannesburg . "That should support precious metals in the near term.

"However, with interest rate futures currently pricing in a 94% probability of the Fed holding rates steady [at its next meeting], we believe that further cuts are unlikely."

US Treasury bonds slipped in early trade today, pushing yields higher on "the persistence of the inflation problem around the world," as one trader put it to Bloomberg.

By lunchtime in London , the spot price of Gold traded at $865.50 per ounce, some $5 above Wednesday's one-week low. The Euro meantime slipped back from $1.5530, the two-day high it reached after Germany reported economic growth of 2.6% for the first three months of this year – sharply ahead of analyst forecasts at a 12-year record.

The Eurostat agency then said consumer prices across the 15-nation Eurozone rose 3.3% last month from April '07, helping to push the price of fixed-income government bonds lower for the fourth session running.

"To clearly spell it out, if we have to follow a tough monetary policy in order to achieve our goal [of low inflation] so be it," said Nicholas Garganas of the European Central Bank to the Financial Times Deutschland yesterday.

In stark contrast to the US Fed's sharp rate-cuts of the last nine months, "this is our duty" Garganas said.

Two-year German bunds yields rose this morning to 3.97% – just shy of the European Central Bank's current 4.0% overnight target.

Looking at the latest Gold futures data, "once again COMEX investors [have] accumulated fresh short positions," notes Mitsui – the precious metals dealer – and in turn cut their net long exposure by 3% to 581 tonnes.

"The liquidation to date across this exchange has been particularly aggressive and severe [since] February."

But new investment in exchange-traded gold funds (ETFs) has "acted to compensate for some of this deep liquidation." And with the risk of counterparty default in the financial sector still a pressing concern, investment in Allocated & Physical Gold continues to grow. ( Read more about this Backstop for Wealthy Investors here... )

Overnight in Tokyo , Japanese gold futures also crept higher, equaling $872.40 per ounce, while the Nikkei stock index added 0.9% despite Mizuho – the second-largest banking group in Japan – writing down $3.9 billion of its credit-related investments for the 12 months ending April.

Here in London Britain 's No.3 – Barclays Bank – today said the value of its credit-market assets fell by $1.9bn between Jan. and April.

The Fortis group of Belgo-Dutch finance firms just added another $585 million to its first-quarter write downs – initially set at $4.1bn in March. And in Paris , Crédit Agricole – which wants to raise $9.1bn from shareholders to cover write-downs at Calyon, its investment banking division – said Thursday it will sell some $7.7bn of assets over the next 18 months.

The third largest bank in France , Crédit Agricole denies it faces any liquidity problems.

But "Recession? What recession?" joked a New York art dealer at last night's modern-art sale at Sotheby's.

Netting a total of $362 million – the greatest ever haul by an art auction – the sale saw Francis Bacon's Triptych, 1976 fetch $86.3m, a new record for a post-war work.

"The rich are casting around for places to park their cash away from the stock market," says Chris Blackhurst in the London Evening Standard . He notes that "at the very moment banks have been laying off employees in their thousands, they've also been hiring executives who specialize in private banking – advising well-heeled clients what to do with their money."

"The grotesquely high compensation of individual finance managers [comes thanks to] the complexity of financial products and the possibility of carrying out huge leveraged trades with little of their own capital at risk," said the German president, Horst Köhler, on Wednesday.

"The monster of global financial markets must be put back in its place."

Calling for tighter regulation of Europe 's investment bank pay structures, Köhler's comments came as Paul Volcker – chairman of the inflation-fighting Federal Reserve at the start of the 1980s – lambasted US authorities for failing to regulate investment banks ahead of the current credit crisis.

Speaking to the Joint Economic Committee of the US Congress, Volcker noted that off-balance-sheet vehicles – such as the Bear Stearns hedge funds that became the first casualties of the subprime mortgage collapse in June 2007 – "were not regulated and [the banks] didn't hold an adequate amount of capital against them.

"Why did that happen after the experience of Enron?"

Looking to the other side of the economy, Volcker then noted that "if there is a real loss of confidence in the Dollar, then I think we are in trouble.

"Without that, we are back to the inflation of the 1970s or worse."

Early Thursday, the price of crude oil held steady some $2 below Tuesday's new record top of almost $127 per barrel. Wheat, corn and rice prices fell sharply on news of increased sowing for the 2008 harvests.

The United Nations' Food & Agriculture Organization said today that global food prices may decline for the second month running in May.

But like the price of Gold , the FAO Food Index has still doubled since April 2005.

The price of crude oil, along with the CRB's index of base metal prices, has risen by 150%.

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 2008

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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