Gold Slips as Yen Surges on Risk Aversion

By: Adrian_Ash

THE PRICE OF GOLD fell again but held above yesterday's 1-week low on Thursday in London, trading 2.2% below last week's finish as world stock markets fell for the third day running.

The Euro held below $1.23 as gold prices slipped and Sterling retreated from an early jump to $1.50.

The Japanese Yen rose to a 5-week high vs. the Dollar.

"Gold is back to trading in line with the Euro," says one London dealer today.

"It will be interesting to see if a return to risk aversion means gold breaks away from this correlation once again."

Silver prices fell 3.4% meantime from Wednesday's peak as crude oil fell through $76 per barrel.

Major economy Treasury bonds rose after new data showed Japan's trade balance, Eurozone industrial orders, and US durable goods orders all coming in weaker than analysts forecast.

In the three years to April, gold's daily movement showed a strong and positive connection with the Euro/Dollar exchange rate of +0.61.

That correlation would read +1.0 if the gold price in Dollars and EUR/USD moved perfectly in lockstep, or –1.0 if they were directly opposed.

Since the start of April, the gold-Euro correlation has collapsed to average –0.25.

"The idea that austerity measures could trigger stagnation is incorrect," writes European Central Bank president Jean-Claude Trichet in an interview with Italy's Repubblica newspaper today, defending the latest round of budget cuts announced by Eurozone governments.

"I don't think that [deflation] risks could materialise."

But "a reduction in the fiscal deficit must be offset by shifts in the private and foreign balances," counters Financial Times economist Martin Wolf, and "the financial sector is impaired...the private sector is highly leveraged [and] interest rates are close to zero."

"It's truly a new Dark Age," agrees Nobel-winning economist Paul Krugman in the NY Times, "in which famous professors are reinventing errors refuted 70 years ago, and calling them insights."

"Europe has been over-zealous in its deficit reduction given that rates are still stuck close to zero and the economic recovery is still fragile," says Steven Barrow, chief currency strategist at Standard Bank today.

"If we are right about this, we feel that the US will be the beneficiary – at least in currency terms – as long as the markets are willing to go on financing the US's fiscal largesse."

A new survey of central-bank and sovereign-wealth managers by Swiss bank UBS says today that half believe the US Dollar will remain the world's No.1 reserve currency by 2035.

In second place – and well ahead of Asian currencies or the Euro – some 22% favor gold as "the most important asset".

Central banks worldwide turned net buyers of gold bullion for the first time in two decades last year.

This week's restatement of Saudi Arabia's gold reserves, plus the collapse of West European sales and ongoing purchases by Russia, puts net central-bank gold buying at almost 223 tonnes for the first six months of 2010 – equal to 12% of total half-yearly demand worldwide on average since 2002.

"Private investors in the United States and Europe, both individuals and institutions, are [also] buying more gold," says gold and precious metals consultant Jeffrey Nichols of American Precious Metals Advisors, "reflecting the same concerns and fears that are driving central banks to accumulate the metal.

"They are increasingly concerned about the huge deficits and debt of governments on both sides of the Atlantic...and that accelerating inflation and depreciating currencies will eat away at their other savings and investments."

By Adrian Ash
BullionVault.com

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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 2010

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