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Gold Bounces as Bernanke Makes Inflation Present and Dangerous

Commodities / Gold & Silver 2009 Dec 16, 2009 - 07:47 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD rose in Asian and early London trade on Wednesday, recovering one-fifth of the last fortnight's 10% drop vs. the Dollar and hitting one-week highs against the Euro ahead of today's interest-rate announcement from the US Federal Reserve.

The Fed statement, due at 14:15 EST (19:15 GMT), is not expected to signal any change to the US central bank's current zero-rate policy.


"Nothing in either the economic data or financial markets will lead the Fed to signal a change in policy," says a BNP analyst quoted by the Wall Street Journal.

"Fed will hike rates in 2011," says a headline at CNN Money.

"Ben Bernanke is the most powerful nerd on the planet," says TIME magazine, naming the Fed chairman as its Person of the Year 2009 after he "led an effort to save the world economy."

US stock-market futures pointed higher early Wednesday, alongside Gold Prices, while European stocks added 1.0% in Frankfurt despite weak Eurozone data.

Government bonds held flat in what dealers called "quiet trade". On the forex market, the Dollar retraced half of Tuesday's 1% rise vs. the Euro, slipping back from 9-week highs.

"The number of [Gold] bears is subsiding for now," says one Hong Kong dealer in a note.

"For the past three days the metal has found support in the 1110 to 1112 area, but strong resistance is still seen near 1138," says Scotia Mocatta, the bullion bank.

"By keeping the interest rate on a record low, in a recovery economy, the Fed [has] made inflation very dangerous and present," says a note from MKS Finance, the trading division of a major Swiss refiner.

"As an interest rate rise is still not expected...bullion will probably test lower at the start of 2010 before rebounding on speculative and investment bargain hunting."

Here in the United Kingdom today – where the central bank has created and spent enough money on government bonds to finance the entire budget deficit for 2009 through its Quantitative Easing program since March – new data showed average earnings rising faster than analysts forecast in November, up 1.5% annually, while unemployment recorded a slight decline.

UK price inflation, as measured by the Retail Price Index (excluding mortgage repayments), last month jumped to a 12-month high of 2.7% year-on-year.

Wednesday's data releases showed Eurozone price inflation falling back last month, however, rising 0.5% year-on-year overall and adding 1.0% when energy prices are ignored.

US consumer-price data was due just ahead of the New York opening. Crude oil today added to Tuesday's sharp bounce, trading above $71 per barrel.

"Gold is not simply a play on perceived inflation expectations or periodic US Dollar weakness but an important hedge against monetary instability," says Mark Thomas, CEO of research group Van Eyk, to the Sydney Morning Herald today.

"Ultimately, Dollar-denominated commodities will never be able to completely ignore changes in the strength of the US Dollar," writes Leon Westgate at South Africa's Standard Bank. "However, for the time being, the Dollar play is becoming less of a factor."

"People are kidding themselves if they think they know where the Gold Price will top out," says Grant Craighead, MD of independent research group Stock Resource.

"People are seeking physical assets, which includes all commodities, and gold is the most liquid."

Banking giants J.P.Morgan Chase, Citigroup and Bank of America are preparing to re-launch collateralized debt obligations (CDOs) backed by high-yield loans, reports SIFMA, the US securities association.

Exact data is unavailable, but the notional value of credit-default swaps – many of which were used to "insure" complex debt derivatives such as CDOs and asset-backed securities – shrank by 39% between Dec. '07 and June '09 according to the Bank for International Settlements.

"In the current crisis," said a BIS report last week, "the combination of the originate-to-distribute [lending] model, together with CDOs, unregulated hedged funds, and undercapitalized investment banks creates an interlinked market structure that adds vulnerability to the system, by effectively removing the liquidity and capital constraints of banks in underwriting loans and in investing in securitized products."

"We are actively discussing the market environment with our clients," SIFMA quotes Philippe Roger, global head of structured-credit trading at former investment bank J.P.Morgan today.

"They think that they are going to be increasingly attracted both to the leveraged-loan asset class and securitization technology and applications related to the high-yield space."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly 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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