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Investors Dump Dollars for Gold Physical Metal 

Commodities / Gold & Silver Dec 17, 2008 - 10:17 AM GMT

By: Adrian_Ash

Commodities THE SPOT GOLD MARKET held inside a tight $10 range early Wednesday after jumping to a nine-week high of $860 per ounce overnight after the US Federal Reserve chose the nuclear-option of zero interest rates.

With US Dollars effectively free to borrow in New York's bank-to-bank market (they already cost just 0.13% last week), crude oil rose back above $45 per barrel on expectations of a major cut to Opec output quotas later today.


US Treasury bonds rose so sharply, 30-year bond yields now point to inflation averaging less than 2.68% per year from now until 2038.

Base metals and food-stuffs all gained in Asian trade, while the Euro held near its own 9-week high vs. the Dollar.

Trading above $1.40 – and more than 11% higher from the start of this month – the single currency held the Gold Price in Euros €5 below Tuesday's AM Gold Fix in London at €605 an ounce.

But Asian and European stocks failed to catch the "zero rate" bid, however, retreating in Taiwan and Germany despite New York's 5.1% jump on the Fed's decision.

UK investors meantime saw the price of gold jump towards last week's new record highs at £559 an ounce, as the British Pound gave back all of its 5-cent bounce to the Dollar on news of a record plunge in retail sales.

"We've got a Fed that's willing to really go the distance for the market right now," said one market analyst to Reuters overnight, cheering the unanimous vote from US policymakers.

"It has to be the Atlas of the world to bear the weight of the financial system on its shoulder," said another.

But "I think the fears of deflation are probably overstated," added a third, "because ultimately the Quantitative Easing has major inflationary potential."

Yesterday's US data showed only a slight decline in core inflation – the Fed's preferred measure until crude oil prices began sinking by two-thirds in July – down to 2.0% from 2.2% per year.

The Eurozone today reported no change in annual consumer-price inflation excluding fuel and food at 1.9% in November.

"[Aiming] to further support credit markets and economic activity" by effectively printing and pouring money into mortgage and Treasury bonds, the Fed said in Tuesday's policy statement that it plans to "sustain the size of the Federal Reserve's balance sheet at a high level" – meaning it will buy assets or accept them as loan collateral.

And in a less reported move, the Federal Reserve also approved the inclusion of "goodwill" when US banks report their rock-solid Tier 1 capital – the base upon which all leveraged bets and loans then sit.

"In other words," explains Kris Sayce in Melbourne for The Daily Reckoning Australia , "banks can now use intangibles such as the value of its brand name as 'hard' capital against its liabilities."

Thus "They can finally put a value on happiness," adds Al Robinson, analyst at Diggers & Drillers .

Overnight in Asian gold trading, "The metals failed to follow through in Asia as customers here, notably physical traders, took advantage of the higher prices to liquidate their holdings," reports Mitsui Busan in Hong Kong.

"The rally ran out of steam when Eur/USD retraced and physical selling continued to emerge."

But while professional traders clipped gold's four-day rally, demand for Physical Gold from private individuals continues to surge, reports Reuters, because "There aren't many assets that are desirable now, and gold is showing its true color as a financial asset," reckons Bill O'Neill of the Logic Advisors consultancy in California.

"People used to buy certificates, now they want physical gold," agrees Fiorenzo Arbini, at the Pamp refinery in Switzerland, noting the shift towards Outright Ownership of Physical Gold that began in mid-2007.

"Production [of small retail-sized units] has dramatically increased since the middle of the year," adds Bernhard Schnellmann, director at fellow refinery Argor-Heraeus, "[but] we cannot cope with demand."

Reuters says Gold Coin or small ingot buyers now have to wait six to eight weeks for delivery. ( Want to Buy Gold today at live spot-market prices? Sidestep the middleman at BullionVault now... )

The Gold Coin Shortage hitting domestic US investors since June this year has now pushed average premiums charged on one-ounce coins to $45 and more, reports the Coin Dealer Newsletter .

"Gold has an image of being the asset of last resort," says Stephen Briggs in London for RBS Global Banking & Markets.

"This could be viewed as old-fashioned, but it is how enough people with enough money to matter think."

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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