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Gold and Silver Rally with Stocks on QE2 and Currency Crisis

Commodities / Gold and Silver 2010 Oct 12, 2010 - 07:32 AM GMT

By: Adrian_Ash


THE PRICE OF GOLD and silver rallied towards Friday's record-high closing levels in London on Tuesday lunchtime, bouncing after world stock markets and commodities had earlier fallen on reports that China is curbing new bank lending to cool its economy.

Banking reserves must be raised by 0.5 percentage points to 17.5% of deposits, Goldman Sachs quoted Beijing officials.

Now closely linked to daily moves in the Dollar gold price, the Euro currency slid to a 1-week low vs. the Dollar, and "as the Euro weakened versus Yen," says one Hong Kong dealer, "long-liquidation [in precious metals] took over, despite a couple of rounds of short-covering by traders."

Gold and silver prices then rallied from $1341 and $22.93 per ounce respectively as European equities cut an earlier 1% drop and the US Dollar eased back on the currency market.

The gold price in Euros touched a 3-week high overnight at €31,400 per kilo. British investors wanting to buy gold today saw the price move back above £850 per ounce.

"Watching the currency market closely, we will take decisive steps, including intervention, when needed," said Japanese prime minister Yoshihiko Noda this morning, repeating Tokyo's position after it attempted to weaken the Yen and support the Dollar at 15-year lows in mid-Sept.

Following Brazil's lead today, Thailand introduced a 15% tax on foreign investors' gains and interest payments. But "It won't change the Baht's [rising] direction," said a senior Bangkok dealer to Bloomberg, "because it's strong in line with other currencies worldwide."

"We live in a world of floating currencies, but excessive volatility is bad and to be avoided by common efforts at the world level," said Belgian central-bank chief – and European Central Bank policymaker – Guy Quaden yesterday.

"The financial crisis could escalate into a currency crisis," agrees the China Securities Journal said in a lead editorial, quoted by Reuters. "There will be no winner."

But ahead of US Treasury secretary Tim Geithner's decision – due Friday – on whether Beijing is a "currency manipulator" and should therefore suffer trade sanctions, "Currency reform does not equate to Yuan appreciation," the State Administration of Foreign Exchange says in a new report.

"The emphasis is more on the improvement of the currency-market mechanism."

Looking at the US Fed's widely-expected second round of quantitative easing, the spot gold market "is pricing in substantial QE already," writes Walter de Wet at Standard Bank in London today.

With flows of scrap-gold rising, plus a seasonal dip in Asian jewelry demand due at year-end, "a conservative approach by the Fed could see gold drop below $1300 in December," he says.

"For global liquidity to be consistent with the current gold price around $1350, the Fed would have to expand its balance sheet by $500bn. [But] should the Fed provide $1trn in additional QE, a gold price closer to $1400 should follow."

Analysts at Goldman Sachs in New York yesterday cited quantitative easing and low US interest rates in their revised 12-month price target for gold, now forecast at $1650 per ounce.
"Gold bugs are buying bullion for the understandable reason that central banks appear committed to printing more money: they fear that eventually this will lead to inflation," says the latest ButtonWood column in The Economist magazine.

By Adrian Ash

Gold price chart, no delay   |   Buy gold online at live prices

Formerly 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 2010

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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