Gold Surges to New All time Highs Against European Currencies

By: Gold_Investments

Gold
Gold was up $1.10 to $807.10 in New York yesterday. It has surged again in Asian and European trading and is trading at $819.90 at 1200 GMT which is a new 27 year high.

Gold has also surged to new all time record highs in Euros and British pounds and is trading at £392.20 GBP (up from £385.50) and €563 EUR (up from €554.95). These new record highs are non inflation adjusted highs.

The surging oil price is an important factor and investors are using gold as an inflation hedge. But of more importance is the dollar falling to new all time record lows against the euro and a basket of currencies again this morning. Morgan Stanley analysts have warned that the dollar could experience a more "violent correction" and their Managing Director in Asia, Stephen Roach has said that gold will likely remain a safe haven given what is happening in the financial markets (more in Forex and Gold below).

Separately, Alan Greenspan has said that the dollar will continue to fall against Asian currencies but was unlikely to fall much further in terms of the euro. This is bullish for the gold price in euro terms.

Credit Suisse warned Monday that supply and demand factors “could trigger a quantum upward change in the gold price”. David Davis, a research analyst at the bank said: “Our studies indicate that the dynamics surrounding the gold supply and demand have begun to change inexorably towards a diminishing supply of gold and increasing investment demand, which will ultimately impact the gold price.” The prediction is based on the assumption that “long term global gold production will begin to decline as the diminishing number of new reserves fail to compensate for dying mines”.

We would concur with Credit Suisse in this regard and believe that gold will experience a quantum jump in the coming months. A quantum upward change or jump is a sudden spectacular advance in the price and one which dramatically skips over intermediate stages. This could result in a gold price over $2,000 per ounce in a short period of time.

Forex and Gold
The dollar fell further overnight and this morning and remains near record highs versus the euro at 1.4521 and at 2.0863 versus sterling.

This morning the U.S. dollar is down to 76.175. The dollar has again broken below previous support at last Friday's new all time record low at 76.22. This is very bearish.

News that a top supermodel is demanding payment in currencies other than the dollar would normally be construed as bullish for the dollar as a contrarian indicator. However, given the fundamentals of the U.S. economy this is not the case.

Brazilian supermodel Gisele Bündchen is refusing to accept payment in U.S. dollars. She has said that she is willing to be paid in nearly any currency apart from the dollar to maximise her earnings. According to Bloomberg, Patricia Bündchen, the model's twin sister and manager said: "Contracts starting now are more attractive in euros because we don't know what will happen to the dollar."

This story echoes the one of Bette Midler demanding to be paid for her concerts in gold Krugerrands in the mid 1970s due to her concerns regarding the dollar.

Far more worrying for the dollar is the fact that Morgan Stanley analysts have warned of a possible very sharp depreciation in the dollar. The decline of the dollar to record lows might turn into a "more violent correction" that requires the United States, the European Union and Japan to intervene in foreign exchange markets, analysts at Morgan Stanley say. "The dollar could potentially weaken meaningfully further," two Morgan Stanley analysts, Stephen Jen and Charles St-Arnaud, wrote in a note sent to clients late last week. "Though coordinated interventions may not be an immediate threat, they should now be on our radar screen."

Any attempt at intervening in currency markets would be ill advised and in the long term futile. Ultimately the economic fundamentals of the world's economies will dictate the value of their currency and no amount of currency intervention will change this salient fact.

Morgan Stanley's Managing Director in Asia, Stephen Roach, one of the most respected economists in the world, wrote that "With weak currency markets, gold is perceived to be a safe haven and that is expected to continue."

Roach's recent bearish pronouncements are being proved prescient. "With both income and wealth effects under pressure," Stephen Roach said, "I don't see any way that saving-short, overly-indebted American consumers can maintain excessive consumption growth." "For a U.S. economy that has drawn disproportionate support from a record 72% share of personal consumption, a consumer-led capitulation spells high and rising recession risk."

Silver
Silver prices have surged 3.5% since yesterday and are up from $14.48 to $14.99 (1100 GMT).

PGMs
Platinum was trading at $1465/1467 (1130 GMT).
Spot palladium was trading at $373/378 an ounce (1130 GMT).

Oil
Oil prices rose by nearly 1% on Tuesday in Asian and European trading. There are expectations of another drop in U.S. crude oil inventories in tomorrow's weekly report from the Department of Energy.The FT reports that energy consumers and speculators are scrambling to take out options contracts to insure themselves against oil prices rising above $100 a barrel – a further sign of growing expectations of a spike in the crude market. Some have even taken out contracts to protect themselves against prices rising to $250 a barrel in the next two years. The buying frenzy has been “extraordinarily” strong in the past week as oil prices rose to a record high of $96.24 a barrel, according to traders and bankers.

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