Gold Market Just "One Day Away" from All-Time Record High on Recession & Inflation Fears

By: Adrian_Ash

SPOT GOLD PRICES continued to record new 27-year highs early Friday, rising within a few cents of $740 per ounce and reaching the highest London Fix since 22nd Jan. 1980 – one day after gold hit its all-time Dollar top of $850 per ounce.

"External news such as the sub-prime crisis as well as the banking sector have all had a positive impact on the yellow metal price," said Jessica Cross, CEO of the Virtual Metals consultancy, on South African radio last night.

"The [upcoming] US elections are also playing a role," she added. "The Republicans are going for economic growth at all costs, even if it means a weaker Dollar and that is obviously boding well for gold."

Fifty-nine per cent of Californians now expect "bad times" financially – led by the housing slump – in the coming year according to a new survey, a rise of 10 percentage points from June.

Generating $1.5 trillion per year, California would be the eighth largest economy in the world if ranked on its own, notes Bloomberg.

But it wasn't only Dollar-gold buyers who saw the Gold Price continue to rise early Friday as the Dollar sank below $1.41 per Euro and hit fresh 15-year lows on its trade-weighted currency index.

Confidence in Britain's central bank is now so poor, The Times of London today ran two separate columnists calling for Mervyn King, the current governor of the Bank of England, to go. The Sterling Price of Gold earlier touched £368 per ounce, a new 16-month high.

In the Eurozone, money supply growth has been "steeply accelerated" by the European Central Bank's record cash injections to the credit markets since August, taking the rate of expansion "most probably close to 14%". according to analysis by Paul Vreymans at the Work For All think tank

"That is three times the agreed and repeatedly confirmed target of 4.5% money-supply growth," he adds, "thereby continuing the accelerating exponential trend the new ECB president Trichet has initiated."

The Price of Gold in Euros today neared its fresh 16-month highs of Thursday at €525 per ounce, a rise of 8% since the global credit crunch first bit at the start of August.

In Japan, the Tocom's most-active gold futures contract closed 1% higher against the Yen today at a 22-year record. The Bank of Japan voted yesterday to keep its interest rates on hold at just 0.5%, the seventh month running of "no change" and a 12-year anniversary for returns to Japanese cash savers below 1% per annum.

"There's some profit taking but it looks like the Japanese still show interest to Buy Gold ," said a Hong Kong bullion dealer to Reuters earlier. "I am looking at the next target of $750."

Platinum, palladium and silver prices all rose this morning, too. But "gold is leading the rest of the precious metals higher," says Michael Widmer, head of metals research at Calyon Bank in London. "Investor sentiment is in favor of gold because of the fundamentals in the market."

Noting that the 14-day relative strength index for gold – a technical analysis tool – has now hit 80, "you can have values of above 80 for some time if we are in an uptrend," he adds.

"At the moment, we're seeing a really strong run-up in prices. At some stage, we will have some sort of consolidation."

Even as Spot Gold Prices push higher on new buying by anxious investors and savers, however, the immediate panic in global credit markets continued to subside.

Asian money market rates ticked lower, and Tokyo's stock market ended the week 1.1% higher from last Friday's close. In Sydney, according to insiders quoted by Bloomberg, Australia's largest home-improvement chain – Wesfarmers – raised a record A$10 billion loan (US$8.7bn) for its purchase of a competitor store. Australia's biggest investment bank, Macquarie, today increased a sale of mortgage-backed bonds by more than two-thirds to A$500 million (US$435m).

Over in Europe, the price of credit-default swaps – complex financial instruments built on the risk of non-paying debt – slipped lower, adding to a drop in US credit-default prices seen yesterday. Government bonds in both Japan and the Eurozone also fell lower in price, as investors sold their "safe haven" of choice during the global credit crunch of August.

But falling bond prices actually mean that those government promises now offer a higher yield to new investors – and they'll need to says Peter Mueller, a senior bond analyst at Commerzbank in Frankfurt.

"There's a high risk of inflation expectations continuing to rise," he believes. The head of fixed-income strategy at Mitsubishi UFJ in Tokyo agrees, telling Bloomberg today that "the theme of the global bond market has changed to inflation concerns from the flight-to-quality seen on the subprime shock."

Long-dated US Treasury bond prices continued to fall in London on Friday, and as for the Australian deals inked today, Standard & Poor's – the global ratings agency – says it may downgrade Wesfarmers's own credit worthiness due to the new loan it's raising.

Investors in Macquarie's new mortgage-backed bonds also signalled their fears of default risk, raising the interest demanded from 0.38% to between 0.40% and 0.82% above one-month interbank loan rates.

"People are concerned about inflation and the weak US economy," says Rhona O'Connell, managing director of GFMS Analytics."Those two elements are bolstering gold as a safe haven."

What's more, "there is still very good physical demand, even at these higher levels," she adds. "We're getting into the strongest quarter in terms of physical buying" as India consumers – the world's hungriest gold buyers – move into the traditional post-harvest festival and wedding season.

"All the good news may have already been factored into the Gold Price ," O'Connell warns. "There should be a correction soon. Gold's starting to look a bit overbought."

But the long-term fundamentals, however, "are looking good".

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 2007

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