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Gold and British Pound Tumble on Deflationary Recession

Commodities / Gold & Silver Nov 12, 2008 - 07:34 AM GMT

By: Adrian_Ash

Commodities THE PRICE OF GOLD dropped $10 an ounce in the first-half of London trade on Wednesday, sliding to a 6-session low as Asian stock markets closed down for the day and European equities gave back an early 1% gain.

"Sentiment [in the Gold market] is still pretty negative," reckons Narayan Gopalakrishnan, a trader at metals refinery group MKS Finance in Geneva, Switzerland, speaking to Bloomberg.


"With Dollar firmness and oil not helping," gold could fall back to last month's 13-month low of $680 an ounce, he believes.

Commodity prices sank yet again this morning, while government bond prices rose and the British Pound plunged to a fresh six-year low on a miserable forecast for growth and prices from the Bank of England.

The Japanese Yen retreated 1.5% from a two-week high vs. the Euro.

"The US Dollar index is close to its highest level this year (seen in October)," reports Mitsui, the precious metals dealer, in its daily note, "and if the current trend continues it is more likely that we will see the precious metals test the lower end of current ranges.

"The pressure on the oil price is relentless," Mitsui adds, "as falling demand from a global recession kicks in. After breaking and closing below $60 yesterday, the January 2007 low of $50 now looks like a target."

The price of light-n-sweet crude oil fell this morning below $59 per barrel, a new 20-month low, ahead of today's US inventory stockpile report – expected to show a collapse in petrol demand.

Copper futures traded at the London Metal Exchange fell 6%. Nickel and lead prices both fell more than 5%.

"The [commodities] supercycle has a flat tyre," says Martyn Davies, executive director of Stellenbosch University's Centre for Chinese Studies, speaking to South Africa's SAfm radio station.

"Perhaps by 2013 things will start to pick up again. But that's a good five years away. I think the sentiment in the Chinese mining space is that this is not going to be a one-, two-year play."

Today the World Bank said it will offer $100bn of fresh aid to those developing countries worst hit by the collapse in global trade.

International trade is set to shrink next year, the World Bank warned – the first contraction since 1982 – cutting expected GDP growth amongst emerging economies from 6.4% to 4.5%.

Each percentage point decline pushes an extra 20 million people into poverty, the World Bank believes.

After the Federal Reserve and US Treasury refinanced giant insurance group AIG with a $150 billion package on Tuesday, "banks in the US and abroad are among the biggest winners," reports the Wall Street Journal .

"Many banks that previously bought protection from the insurer on collateralized debt obligations backed by subprime-mortgage bonds, commercial-mortgage loans and other assets stand to recoup the bulk of their investments under a plan by AIG and the Federal Reserve Bank of New York to buy around $70 billion of those securities via a new company."

Across the Atlantic in Paris, meantime, "a new French agency will make its debut in the international bond markets this week," the Financial Times says, "raising bail-out funding for the country's banks."

The Société de Financement de l'Economie Française (SFEF) plans to sell €3-5 billion of three-year bonds this week, hoping to repeat the successful issue of £10bn of government-backed banking bonds in London.

Analysis from Standard & Poor's says that Europe's banks need to refinance €1,150bn ($1,477bn) of debt over the next three years.

Today the Gold Price in Euros held above €580 per ounce, while the Gold Price in Sterling jumped to £482 on a fresh plunge in the UK currency.

The British Pound fell to a new six-year low vs. the Dollar of $1.5200 after the Bank of England warned in its quarterly report that inflation could sink to 1% from the current 5.6% rate in 2010.

The Bank's fan chart of potential paths for inflation include a possible deflation in prices – unseen in the UK since 1933 – by the end of 2009. Already in recession, economic output is forecast to shrink for the next 12 months.

UK unemployment jumped by 142,000 in the three months to end-Sept., the official data agency said today, taking the jobless total above 1.8 million – a level last seen when the current New Labour administration took power in 1997.

Average earnings in the UK – including bonuses – meantime lagged growth in the cost of living by more than 2.5% in the year to October.

The Bank of England's governor – career academic Mervyn King – today flatly denied there had been "any pressure whatsoever" from the UK government to cut interest rates.

Last week the BoE slashed its key lending rate by 150 basis points to just 3.0%, a five-decade low that took real interest rates to a 28-year low of minus 2.6%.

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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