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London Gold Market Report

Fri, Dec 5 2008, 13:58 GMT
by Adrian Ash

BullionVault.com

Gold Slides 3% on Half-Million US Job Losses; "Suicidal Policies" to Follow

THE SPOT PRICE OF GOLD gave back a tepid rally early in London on Friday before slumping to fresh two-week lows at $750 an ounce on news of a huge jump in US unemployment.

More than half-a-million Americans lost their jobs last month, reported the Bureau of Labor Studies. Wall Street analysts had been expecting 325,000 job losses.

The data forced a fresh spike in forex-market volatility, sending both Euros and Sterling sharply higher after world equity markets had slid once again, driven down by fresh strength in the over-borrowed US Dollar and Japanese Yen.

The two basket-case currencies – now paying just 1.0% and 0.3% per year respectively in interest – have gained 26% and 42% each vs. the Euro since mid-July, reversing 31 and 83 months of steady declines

Yesterday the European Central Bank (ECB) joined the fun, cutting its target rate by a record 75 points to 2.50%. New data released this morning showed Germany factory collapsing by more than one-sixth in the year to October.

"It should be very clear that if a government’s intention is to destroy the value of its currency, there is nothing easier to do," writes Dr.Marc Faber, the Thai-based fund manager and author, in his latest Gloom, Boom & Doom Report.

"Indeed, most governments in the course of history have done so very successfully – the latest, and by far the most successful, being Zimbabwe."

Should the US asset markets fail to respond to such "suicidal fiscal and monetary policies," he continues, "and the economy deteriorate further, the government’s lending program could always be doubled or quadrupled. The worse the economy performs, the more the 'money printing' mechanism will be applied.

"Therefore I continue to recommend that investors accumulate Physical Gold and silver. Following their devastating declines, some Gold Mining exploration companies should also offer substantial upside potential."

Here in London today, the FTSE100 stock index lost 1.3%, unwinding this week's rally entirely, while the Gold Price in Sterling fell back to Monday's low at £516 an ounce.

French, German and Italian investors saw the Gold Price drop almost 8% from last week's close, down to €595 for the first time since Nov. 20th.

Crude oil meantime ticked back down to $44 per barrel, just above yesterday's four-year lows vs. the Dollar.

Measured against the Fast-Sinking British Pound, however, crude oil has retreated to only an 18-month low.

"Oil prices below $50 per barrel are unlikely to be sustainable in anything but the short term," writes John Kemp at Reuters, "because at this level prices do not do enough to ration energy demand or encourage investment in new oilfields and alternative energy technologies.

"Only much higher prices above $70 or even $80 will ensure adequate supplies in the medium term. The Nymex forward curve [of futures prices] currently puts oil at $85 per barrel in Dec 2017. Even assuming this proves to be a correct prediction, $85 in Dec 2017 will not be worth the same as $85 now. How much less it would be worth is sensitive to the average rate of inflation over the period."

Inflation-sensitive US Treasury bonds failed to show any fear of consumer price rises by 2017 on Friday. The yield offered by 10-year bonds remained at 2.56% p – nearly half-a-per-cent below the all-time low broken only this Monday at 3.00%.

"A very strange thing has happened in the Treasury Inflation Protected (TIP) market," writes Eric Fry of The Rude Awakening. "Breakeven inflation rates have collapsed to all-time lows.

"The 10-year TIP, for example, is pricing in a razor-thin inflation rate of just 0.3% per year during the next 10 years," says Fry. "Put another way, if the inflation rate averages more than 0.3% per year during the next 10 years, the buyer of a 10-year TIP at today's prices would be much better off than the buyer of a conventional 10-year Treasury bond."

US inflation has averaged less than 0.3% during one decade only on record, during the global slump of the 1930s.

The purchasing power of Gold fast out-stripped even the value of Dollars during the Great Depression, however, buying 75% more goods and services on average than it had during the Twenties.

Published on  Fri, Dec 5 2008, 13:58 GMT