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Gold Boosted by Zero Yield, as World Currencies Devalue on Negative Real Interest Rates

Commodities / Gold & Silver 2009 Feb 05, 2009 - 08:15 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleTHE SPOT GOLD PRICE jumped sharply for US and Euro investors on Thursday morning in London, rising 1.7% and 1.4% respectively as world stock markets fell despite fresh cuts to central-bank interest rates.

Of five central banks voting on rates this week, only the European Central Bank (ECB) in Frankfurt failed to reduce its cost of money, holding rates steady at 2.0%.

The Euro spiked down on the news today, losing 2¢ from this week's high to trade below $1.2850 – a level first broken (on the way up) in Jan. 2004.

Priced in Euros, the value of gold – which yields nothing but also carries no counter-party default risk – rose to a 3-session high of €720 an ounce, more than 14% higher for 2009 to date.

"Expectations of future inflation and Dollar depreciation are driving the market right now," reckons Bayram Dincer, an analyst at Dresdner Bank, speaking to Bloomberg from Zurich.

"Layer on top of [shrinking supply] all the liquidity, the printing of money and the other measures the government is taking," adds Joe Foster, gold manager at the $8 billion Van Eck Funds in New York, and "it could create an explosive situation."

Thursday's foreign exchange action confirmed the currency markets' deflationary verdict on falling premiums, first seen last year as the US Fed and Bank of Japan cut their rates to zero and their currencies leapt.

Early in Prague, the Czech central bank slashed its interest rates by half of one per cent, matching an all-time low at 1.75% and sparking a bounce in the Czech Koruna vs. the Euro.

Midday here in London, the Bank of England today took its base rate further into record-low territory at 1.0%. Currency traders then pushed the Pound Sterling to a two-week high above $1.4650.

Tuesday saw the Reserve Bank of Australia cut its interest rate to a 45-year low. The Aussie Dollar bounced from near-6 year lows in response.

Yesterday the central bank of Norway cut its target interest rate by 50 basis points to 2.50%. The Norwegian Krone turned higher after losing one-third of its value vs. the Dollar since July last year.

"Overall it's still a bullish chart but with near-term downside risk," says Phil Smith in his technical analysis of the Gold Market for Reuters India today.

Pointing to the "trendline break" of the upwards move starting in mid-Jan., "the line is now acting as overhead resistance," Smith adds.

"The market reacted down after bumping up against resistance at 935."

Also in India today – destination for one-fifth of the world's physical gold sales each year – the Press Trust of India reports rising demand from jewelers and retail consumers amid the current Hindu marriage season.

But "buying activity is [still] limited as prices are high," said one bank gold-dealer to Reuters this morning.

"There is not much demand," agrees another dealer, citing a "psychological barrier" to consumer jewelry demand at 14,000 Rupees per 10 grams.

Tuesday saw the Federal Reserve in Washington extend until Oct. 30th five emergency lending programs for US commercial banks, previously scheduled to expire at the end of April.

The US central bank also extended a "swap line" agreement with 13 other major central banks, saying it would "address continued pressures in global US Dollar funding markets."

Swiss reinsurance giant Swiss Re today said it's asked legendary US investor Warren Buffett to fund half of a CHF 5 billion cash raising ($4.3bn) after reporting a CHF1bn loss for 2008.

By year-end, Swiss Re says, its capital base stood CHF2bn ($2.32bn) below the level needed to retain its crucial AA credit rating.

Over in Frankfurt meantime, Germany largest bank – Deutsche – revealed its biggest ever annual loss at €3.9 billion ($5bn).

In the last 3 months of 2008, corporate banking and securities dealing at Deutsche Bank lost €5.8bn before tax.

New data today showed German manufacturing orders shrinking for the fourth month running in December, down almost 7% month-on-month.

Yesterday the Kremlin in Moscow said it will pump the equivalent of $40 billion into Russia's ailing banks.

The Russian Ruble has lost one-third of its value since summer '08 despite offering 13% interest rates.

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 2009

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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