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Gold Back to $1,000 on ECB Inflation Busting Interest Rate Rising Plan

Commodities / Gold & Silver Jun 11, 2008 - 07:49 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES ticked higher in London trade early Wednesday, recovering 1.3% from yesterday's one-week low as crude oil jumped back to $133 per barrel.

Asian equities were mixed after the US Dollar retreated from a new 15-week high against the Japanese Yen above ¥107.70.

European stock markets held flat. Short-dated government bonds recovered from Tuesday's sharp sell-off, but corporate bond prices continued to fall.

The average yield on investment-grade bonds closed New York at 6.32% yesterday, the highest level since July 2002 according to Bloomberg data.

"There's a good chance that Gold may go back above $1,000 in the short- to medium-term," reckons Richard Davis at Blackrock, the investment group half-owned by Merrill Lynch.

"We're headed for inflationary times and gold has always been a safe asset to protect your wealth against inflation." ( Oh really? Get the facts on Gold vs. Inflation here... )

Today the price of corn rose for the sixth session running, pulling soybeans and wheat higher after the official forecast of US output was cut by 3.2% in response to the cold, wet weather still hitting the Mid West.

Ahead of today's US energy stockpiles report – due to show a drop of 1.5 million barrels for last week, taking the total "well below" the five-year average according to one Zurich-based trader – gasoline prices at the pump have now reached a record average of $4.05 per gallon according to the AAA and Oil Price Information Service.

Here in the United Kingdom , where tanker drivers could close 1-in-10 filling stations by striking over pay this weekend, the average price for unleaded petrol has breached £1.17 per liter.

Equal to $8.68 per US gallon, that's higher by one-fifth from this time last year.

But just like the US Federal Reserve and Bank of England in London – and despite its recent tough talk on inflation – not even the European Central Bank "is talking about a series of rate increases" said ECB member Juergen Stark this morning.

With Eurozone interest rates now only just ahead of consumer-price inflation at 4.0%, Stark's surprise comments left the Euro struggling below $1.55 to the US currency.

The Gold Price in Euros rose more than 1% to touch €565 per ounce.

"In our view Gold Prices are likely to trade in a range-bound fashion over the forthcoming months," says the latest analysis from Barclays Capital commodities team.

"Some external factors have become less supportive, such as the potential end of the Fed rate-cutting cycle.

"[But] heightening inflationary concerns and constrained mine supply will continue to support Gold."

The gold-mining industry has "fallen flat on its face" according to John Sayers, head of South African miner DRDGold.

Speaking at the Africa Mining Congress 2008 in Johannesburg yesterday, he said that poor returns to shareholders came thanks "in major part" to an industry-wide failure to focus on current operations rather than trying to grow reserves.

On the other side of the Gold Market , meantime, Indian and Middle Eastern bullion dealers report growing sales after the price spike of mid-March dented their traditionally strong spring season.

"Buying had slowly picked up in bullion markets," said Debjyoti Chatterjee of MAPE Admisi to the Economic Times of India overnight. "Traders do not [now] expect major price declines."

"People are buying more now, despite getting less in weight for their money than a few years ago," the Gulf Weekly quotes Khalid Ibrahim, branch manager in Bahrain for Atlas Jewelry.

"Gold remains a solid asset in my opinion."

Another gold dealer in Manama , Bahrain , believes that "people are buying more Gold because they fear facing even higher increases in the price in future."

Back on the forex market, meanwhile, the British Pound fell hard this morning, briefly sliding through $1.9500 on news that UK unemployment rose for the fourth month running in May after reaching 5.3% of the working-age population this spring.

Average earnings growth slowed to 3.1% annually – the 11th month of sub-inflationary growth since the start of last yea – while the UK 's trade balance continued to worsen.

Excluding services, the trade deficit in goods sank to -£7.6bn ($14.8bn).

Today the Gold Price in British Pounds recovered to £448 per ounce, rising 1.2% from Tuesday's two-week low but remaining more than 12% off the all-time record set in mid-March at £512.

By Adrian Ash

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 , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

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.

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