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Gold Rallies on US May 4.2% CPI Inflation 

Commodities / Gold & Silver Jun 13, 2008 - 09:37 AM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES rallied into the US opening on Friday, bouncing from their second dip below $860 per ounce on news that US consumer-price inflation rose to 4.2% in May.

Crude oil and the Euro held flat, meantime, while Asian stock markets closed out their worst week since the global banking crisis began in summer '07.


The Gold Price in Euros jumped almost 1% to €566.50 per ounce, as early indications from the Republic of Ireland's referendum showing a strong "No" vote against the Lisbon Treaty of European political union.

That threatens a "serious crisis" in the European Union says RTE, the Irish broadcaster.

"I find the recent strengthening of the Dollar satisfying," said France 's Christine Lagarde ahead of the G8 meeting of finance ministers in Osaka , Japan today.

The US currency has pushed the Euro almost 5% lower in the last eight weeks.

"However," Lagarde went on, "there is a cause/effect link between the stability of financial markets, the Euro-Dollar exchange rate, and the increasing price of oil products."

"Defense of the Dollar has become an urgent issue," agreed Yoshimi Watanabe, the Japanese finance minister, speaking to the Kyodo news agency.

Tokyo 's stock market crept 0.6% higher today as the Yen fell back towards a new low for 2008 vs. the Dollar. It has dropped 12% of its Dollar value since the Bear Stearns' banking crisis of mid-March.

Here in London , banking stocks defied a broader 0.5% drop after the City watchdog, the Financial Services Authority (FSA), said it will restrict short selling by equity traders during new rights issues.

Shares in HBOS – the UK's largest mortgage lender, which fell through its offer price for a $7.8 billion rights issue on Wednesday – bounced 13% on the news, as short-sellers closed out what the Financial Times calls their "siege".

New regulatory powers may also hit the US commodity markets after the Senate's assistant majority-leader Richard Durbin (Democrat, Illinois ) introduced a bill to increase funds and staff levels at the Commodities Futures Trading Commission (CFTC).

"While gas prices climb every day," said Durbin on Thursday, "the understaffed and underfunded CFTC is virtually powerless to stop it. We simply don't know what role speculation or manipulation is playing in price increases."

Meantime in China , the Bank of Beijing – the country's largest commercial bank by assets – just became the 24th bank to gained approval for Trading Gold on the Shanghai Gold Exchange (SGE).

The Bank of Beijing follows three foreign banks – HSBC, Standard Chartered and Nova Scotia – in joining the SGE this week. Access to the Gold Market is also being broadened in Japan , said the Tokyo Stock Exchange today, with the launch on 30th June of a joint-listing for the SPDR Gold Shares ETF based in New York .

"We have reason to believe that Gold will hit $2,000 in the coming years after it broke the $1,000 level," said Chinese gold-fund investment manager Wang Weilie to Reuters overnight.

"I myself have bought and stored several hundred kilograms of gold bars, but I do not wear any Gold Jewelry ," he went on.

Contrasting his Gold Investment strategy with the "gold bugs" of 1980s and '90s America , "we Chinese should be 'gold dragons' instead," says Wang. Reuters reports that his clients have doubled their money in the last six months.

Looking at the weight of Chinese government funds now held in US Treasuries, "I don't think it's a smart move to invest in US bonds," said Cheng Siwei, former vice-chair of the National People's Congress in Beijing , at a conference yesterday.

"We need smart capitalists to invest in ourselves," Cheng explained, instead of lending money to the American government to help fund the US-China Trade Deficit .

Up to one third of China 's $1.7 trillion foreign currency reserves are held in US Treasury bonds. Short-dated US Treasuries put in their worst price-drop since 1982 this week, with two-year yields rising almost 0.7% to 3.07%.

Eurozone government bonds also sank in price, accelerating their loss on Friday after the Eurostat data agency said wage inflation in the economic union hit 3.7% per year during the first quarter – a six-year high.

Iran said this week it will sell its Eurozone bonds, moving into equities and Gold Bullion to side-step European sanctions aimed at denting Tehran 's nuclear weapons research.

"Upon the decision of the government's task force, a segment of Iran 's foreign exchange assets will be converted into real assets such as Gold and stocks," said deputy finance minister Mohsen Talaie to the Etemad-e Melli newspaper on Monday.

"It all goes to prove the gold bug axiom," says Ambrose Evans-Pritchard for The Daily Telegraph in London .

"Nations – like people – will invariably turn to bullion as the ultimate store of value when all is threatened."

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 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.

Adrian Ash Archive

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