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Gold in " Bull Run " Ahead of US Interest-Rate Decision; Japan Remains in Post-Bubble Depression 18 Years Later

Commodities / Gold & Silver Oct 31, 2007 - 09:25 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES rose sharply late-morning in London on Wednesday, recovering an overnight drop in Asia to break above last week's 27-year closing high above $785 per ounce.


Silver was little changed from Tuesday's new 8-month high. Platinum recovered $2 per ounce of its $16 drop to $1,438 per ounce last night in New York . Crude oil slipped further below $90 per barrel.

"The Gold Market is in a bull run," notes Frederic Panizzutti at MKS Finance. "The consensus here is that gold could reach $800 in the short term and that's motivating the market higher. Also, the risk for a US rate cut is feeding the trend."

Today in Tokyo , the Tocom's most-active gold futures contract – now due for delivery in Oct. '08 – crept ¥5 higher per gram to equal $790 per ounce. The Nikkei stock-market index added 0.5% by the close, but most other Asian equities held flat.

European stock averages were unchanged in the first three hours of trade.

On the currency markets, meantime, the Euro pushed higher to reach a new lifetime high against the Dollar above $1.4465. The British Pound – which recorded a new all-time low against gold on Monday – also rose, breaking new quarter-century records above $2.0700 and pushing the Gold Price in Sterling down to a 3-day low overnight of £376 per ounce.

Indeed, it was "situation normal" for the world's big currency trends overnight, as the Euro and British Pound were little changed against each other and the Japanese Yen fell towards new record lows versus the "carry trade" currencies of New Zealand and Australia .

And why shouldn't the big trends push on? The Federal Reserve is set to dent the US Dollar's value still further today according to 94% of the betting on Fed fund futures. They predict a cut in US interest rates to 4.50% or perhaps even 4.25% this afternoon.

"[Cheaper money] is a little bit like chicken soup," says Nicolas Retsinas, director of housing studies at Harvard University . "It's certainly not going to hurt.

"But we think the more significant problem in the housing sector is the [unsold] inventory. It's not just the affordability of the credit; it's even the access to the credit which is a question today." ( The Fed itself is working to restrict the availability of credit; get the full story here... )

"With both income and wealth effects under pressure," says Stephen Roach, formerly chief economist and now head of Asian markets at Morgan Stanley, "I don't see any way that saving-short, overly-indebted American consumers can maintain excessive consumption growth.

"For a US economy that has drawn disproportionate support from a record 72% share of personal consumption, a consumer-led capitulation spells high and rising recession risk."

Just how bad could the looming debt-led recession in the United States become?

"There's a very good chance we'll see a 25 basis-point cut today, plus a signal that they've got more to do going forward," said Andrew Bosomworth at Pimco, the world's largest bond fund, in an interview with Bloomberg from Munich, Germany, earlier.

"What has to be moving up the priority scale on the Fed's radar screen is preventing the unemployment rate from rising. We'll see lower short-term yields."

Slashing interest rates to prevent recession failed to stop Japan sliding into a debt depression in the mid-1990s, however.

The Bank of Japan first cut its target interest rate below 1.0% in Sept. 1995. Today it voted to keep interest rates at 0.5% for the seventh month running. But this super-cheap money has failed to stoke the Japanese economy so far.

Nearly 18 years after Japan 's real estate and corporate debt bubble burst at the end of 1989, the Tokyo statistics agency today reported that total cash earnings for Japanese workers fell by 0.5% on average in Sept. from the same month in 2006.

After briefly climbing into positive territory when the Nikkei stock index finally turned higher in 2003, Japanese wages have now been declining again since Dec. last year.

The Nikkei stock index remains 60% off its all-time top of Dec. 1989. Tokyo real estate prices stand more than two-thirds below 1995 prices.

Japanese investors Buying Gold , on the other hand, have seen it climb more than 140% against the Yen over the last decade.

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 2007

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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