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London Gold Market Report

Thu, Apr 9 2009, 12:58 GMT
by Adrian Ash

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Gold Slips into Easter Holiday But "Inflation's the Price of Saving the World" as Tokyo, London and Berlin Raise Monetary Stimulus

THE SPOT PRICE of physical gold fell inside a tight range early Thursday in London, approaching the long Easter holiday weekend at $877 an ounce.

For UK and European investors, the Gold Price dropped back to last week's finish at £602 and €663 an ounce respectively as the US Dollar pushed higher on the currency markets.

Government bond prices slipped and world equities rose sharply. Crude oil jumped almost 3% to rise towards $51 per barrel.

"I'm betting on gold because I think disaster is NOT coming," writes Donald Luskin, chief investment officer of Trend Macrolytics – an economics consultancy for finance institutions – in the latest edition of Smart Money from the Wall Street Journal.

"I think the central banks of the world, led by our own Federal Reserve, are going to save the world – but at a price, the price of inflation. In my model, inflation is the one and only thing that determines the Gold Price. And inflation is coming."

Today the United States reported lower-than-expected import price inflation for March, clocked at 0.5% monthly after Feb.'s 0.2% drop.

Meantime in Tokyo, the ruling Liberal Democrat party launched a new record stimulus plan equal to $154 billion, taking total stimulus spending in 2009-10 to some 5% of Japan's GDP and potentially forcing record government-bond issue of ¥44 trillion ($440bn).

The German government made an all-out bid for the failing Hypo Real Estate lender, pricing the remaining shares not yet in state hands at €290 million and citing "barely quantifiable consequences for the national and international financial markets" if the bank collapsed.

And here in London, the Bank of England maintained its key lending rate at a record historical low of 0.5%.

It also vowed to continue pumping £25 billion ($38bn) of newly-created money into the UK's financial markets via "Quantitative Easing" every month – more than doubling the average money-supply growth rate of the last six years.

Food-price inflation in the United Kingdom was clocked last month at 9% per year. Factory-gate prices for all product groups barring petroleum, textiles and worked-metal rose 6% or faster in the year-to-March, the official UK data agency said this morning.

Elsewhere in the precious metals market today, "Platinum and palladium are both finding very good support," says Walter de Wet for Standard Bank in Jo'burg today – but only due to investment demand rather than a recovery in industrial use, still flagging as global car production slumps.

"ETF holdings for platinum are now almost 9% of annual mine supply. Palladium ETF holdings are more than 15% of annual mine supply," says de Wet, and "both metals could plummet" if an application by ETF Securities to launch funds in the United States is rejected.

Global holdings in Gold ETFs, for comparison, now stand above 50% of annual mining output, but are less than 1% of total above-ground supplies – estimated at some 160,000 tonnes.

New data today from world No.2 platinum producer Russia showed its gold and foreign-currency reserves shrinking by $3 billion last week to stand at $385bn all told – down by more than a third from the all-time record his in August '08.

As a proportion of Russia's forex stockpile, Gold Bullion now accounts for some 4.3%, up from August's low of 2.2% but well below current prime minister Vladimir Putin's target of 10%, set earlier this decade.

Like Russia – and also calling this month for a new reserve currency to replace the US Dollar – "China's leverage comes not from the fact that it has a lot of dollars, but rather from the possibility that it might stop adding to its Dollar portfolio," notes Brad Setser in his blog for the Council on Foreign Relations.

"China's $1.5 trillion or so in US portfolio increasingly makes both sides of the Pacific nervous. Letting that portfolio grow to $2 trillion, or $2.5 trillion, won't make the underlying issues go away.

"Let's hope that China's stimulus proves strong enough for China to lead the rebound in the global economy – and for Chinese demand to emerge as a true engine for global growth."

This week the European Central Bank (ECB) raised the value of gold held by its members to €241.7 billion, up by 11% after a regular quarterly revision to the "book price".

One member sold 6.5 tonnes of metal in the week-ending last Friday, the ECB added, but full-year sales by signatories to the Central Bank Gold Agreement – due to expire on 26th Sept. – are on target to remain well below the agreed 500-tonne limit at just 180 tonnes.

"Renewal of the CBGA in September looks likely," said Philip Klapwijk at this week's launch of his GFMS consultancy's new Gold Survey, "if only because it's the path of least resistance."

But "if there is no renewal of the CBGA," counter Matt Turner and Gary Mead today, writing for Virtual Metals in the latest Fortis Metals Monthly, "that would send a tremendously bullish signal to the Gold Price at a time when there are many more actors on the buy-side, such as private investors, and an obviously slowing interest to sell."

A failure to renew "would boost gold's status as a reserve asset, giving holders greater flexibility in how they bought and sold it. It would also encourage other central banks with large forex reserves but little gold (such as China) to buy.

"After all, who wants to buy something for which they need an agreement in order to resell?"

Published on  Thu, Apr 9 2009, 12:58 GMT