Gold Corrects Following Fed Statement as British Pound Sinks

By: Adrian_Ash

THE PRICE OF GOLD bounced 0.8% from its third dip to $1007 in two days early Thursday in London, while world stock markets fell and government bond prices rose.

Commodities slipped 0.5% on the Reuters-Jeffries CRB index. The US Dollar held near 12-month lows on the currency market after the Federal Reserve voted Wednesday to keep its key interest rate at zero.

The Fed also extended by three months its $1.5 trillion program of mortgage-bond purchases in a bid to cap home-loan costs.

"Although speculators are piling in, the [gold] market doesn't seem feverish," notes the Virtual Metals consultancy in its latest Metals Monthly report for BNP Paribas and Fortis banks.

"A limited pullback is the most likely short-term move," says VM, "but in the mid-term a rally far beyond where we are today will largely depend on inflationary trends."

"The longer term uptrend remains," says London market-maker Scotia Mocatta, "however in the short term there has been range trading tendency that should give bulls some hesitance."

"Gold remains well supported," reckons Walter de Wet at Standard Bank in his commodities note, "despite the US Dollar strengthening against the Euro early this morning.

"The support is even more noteworthy given crude oil's slide yesterday" after much weaker-than-expected US energy-use data.

Overnight the US Dollar rallied from new 2009 lows vs. the Euro, helping to hold the gold price in Euros above €685 an ounce.

The US currency fell further against the Japanese Yen however, sliding back towards last week's 7-month lows near ¥90 per Dollar.

Sterling meantime sank on a raft of bad news, hitting a five-month low against both the Euro and Yen after Britain's chief central banker, Mervyn King, said he wants to keep the Pound weak.

"[The] rebalancing of the UK economy that I have been talking about for about 10 years is very necessary," the Bank of England governor said in an interview with Newcastle's Journal.

"I think the fall in the exchange rate...will be helpful to that process. What we need to see now is a shift of resources into net exports...producing things that compete with imports that help to reduce the trade deficit."

News also broke early Thursday that the Bank of England has called a seminar of "all" major economists on London next Tuesday, apparently aimed at reassuring bank analysts over its record-low interest rates and record-breaking program of quantitative easing – currently funding the UK government's entire budget deficit for 2009-to-date.

Private UK banks face "very notable...downgrades", warned ratings agency Moody's today, if the government goes ahead with plans for 'living wills' to make dismantling bankrupt lenders easier in future.

On the political front meantime, UK prime minister Gordon Brown suffered a series of rebukes from the US White House, which leaked news that it turned down five separate requests for head-to-head meetings with president Barack Obama ahead of this weekend's G20 summit in Pittsburgh.

Today the Gold Price in Sterling – more than three times higher from Gordon Brown's famous gold sales of 10 years ago – jumped 1.5% to a fresh 5-month high of £627 an ounce.

By Adrian Ash
BullionVault.com

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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

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