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Gold Falls as G20 Fight Deflation by Any Means

Commodities / Gold & Silver 2009 Apr 02, 2009 - 08:48 AM GMT

By: Adrian_Ash

Commodities Best Financial Markets Analysis ArticleTHE PRICE OF physical gold fell against all major currencies early Thursday, dropping 2% versus the Dollar as global stock markets jumped and Treasury bonds were sold lower.

Crude oil bounced hard, back above $50 per barrel, as base metals and foodstuffs crept higher.


Ahead of today's G20 communiqué on global stimulus spending and finance regulation from the world leaders meeting in London, the US Dollar fell together with Gold Bullion , spiking to a one-week low vs. the Euro after Eurozone interest rates were cut by less than analysts forecast.

ECB staff had hinted there was "more leeway" to reduce the cost of money – now at 1.25% – after this week's raft of poor data from the 16-nation currency zone was capped by an early "flash" estimate of annual inflation at just 0.6% in March.

"Good physical selling of gold sets in whenever the price breaches $930," says a note from Walter de Wet at Standard Bank in Johannesburg today.

"Although Gold ETF holdings continue to increase, it's not enough for gold to break above $950. For this, we would need to see more investment demand, as we do not expect jewelry demand to support the price."

New York's giant SPDR Gold ETF maintained its record gold backing of 1,147 tonnes once again on Wednesday for the fourth time running, but only the 28th day of no growth in 62 sessions so far this year.

Gold Bullion held by the Zurich Cantonal Bank's Gold ETF in Switzerland meantime swelled by 37.5% between Jan. and end-March, a press release said this morning.

Across in India – formerly the world's No.1 consumer market for physical gold – a new Gold ETF was offered to investors by SBI Bank on Wednesday, despite the disappointing uptake of the four existing schemes.

"If there is one asset class that has clearly benefited from the fall in the equity markets, it's undoubtedly gold," says the Economic Times today, noting that the Sensex index of Indian stocks has dropped 23% since Oct., while the Gold Price in Indian Rupees has risen 15%.

" Gold ETFs have seen an influx of nearly 14% in their asset base since end-Sept. '08," says the paper.

Today world stock markets leapt – adding 7% in Hong Kong and 4% in Frankfurt – on what the newswires called evidence that the US economy "is on the mend".

Here in London, world leaders attending the G20 summit near the Canary Wharf financial district were said to be "close" to agreeing a plan for co-ordinated stimulus and financial rules despite a clear division between Anglo-American and Franco-German delegates.

"I've seen more people turn out to oppose a Tesco supermarket's planning application," says one BBC reporter just beyond the "ring of steel" keeping anti-capitalist and climate change protesters away from the meeting in East London.

"Never has bad looked so good," says USA Today after Wednesday's new that US auto sales leapt 25% month-on-month in March – the first rise in 17 months – but remained well over a third below March 2008, itself down by 8% from a year earlier.

Pending home sales also jumped in Feb., while manufacturing activity shrank less quickly than forecast.

Construction spending fell for the fifth month running.

Here in the United Kingdom, meantime, house prices in March recorded their first month-on-month rise since Oct. 2007, creeping 0.9% higher from Feb. but remaining almost one-fifth below their peak, according to the Nationwide mortgage lender.

UK construction output shrank yet again, meantime, but the pace of decline slowed.

The British Pound rose sharply this morning on the currency markets, breaking four-week highs against the single currency in volatile trade ahead of the European Central Bank's decision.

That squashed the Gold Price in Sterling to a 7-week low beneath £620 an ounce, up by more than one-third from this time last year but an 11% discount to late-Feb.'s new record highs.

French, German and Italian investors now Ready to Buy  Gold saw the price drop 3.3% early Thursday, touching a 6-session low on the ECB's rate-cut beneath €680 an ounce.

"Gold's [now] a very attractive asset class," said Rob Krcmarov, head of exploration at Barrick Mining – the world's No.1 gold miner – at a conference in Santiago, Chile, this week.

"In terms of prices, obviously mine supply is going down. The industry in general is not replacing supply. The rate of discovery is decreasing," Krcmarov told Reuters, noting a 14% drop in global gold output between 2001 and 2009.

Driven by metal ores and mineral sales, Australia's trade balance turned sharply higher in Feb. new data said overnight.

Commodity prices in neighboring New Zealand then bounced in March, according to ANZ Bank, after plunging nearly 5% the month before.

Today in Bern, central-bank chief Philipp Hildebrand confirmed the Swiss National Bank is actively working to devalue its currency, the previously safe-haven "hard money" Franc.

"A renewed appreciation of the Franc contains the risk of a sustained deflationary dynamic in Switzerland," Hildebrand told an asset management forum.

"It's about preventing deflation by all means."

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 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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