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Gold Jumps as Euro Crisis Deepens, "Buy Now If Ever" Urges Fund Manager

Commodities / Gold and Silver 2010 Nov 24, 2010 - 07:38 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF GOLD held onto yesterday's sharp jump against all major currencies in Asia and London on Wednesday, trading within 2% of this year's record highs for Euro and Sterling investors looking to buy gold as global stock markets bounced.

Crude oil also rallied from Tuesday's sell-off, and silver prices stood little changed from last week's finish at $27.50 per ounce.



Prices for default insurance on Eurozone debt jumped – and Spain was forced to delay the sale of €13.5 billion in state-guaranteed bonds – after German chancellor Merkel said the Euro faces "exceptionally serious" problems, but repeated her call for bond-buyers to bear some level of bail-out costs.

European Central Bank policy-maker Ewald Nowotny called Merkel's comments "irritating".

Two South Korean civilians were meantime found dead following yesterday's attack by the Stalinist North on the disputed island of Yeonpyeong.

"Geopolitical news typically causes knee-jerk reactions in the gold market, with gains never sustained," says MKS Finance in Geneva, Switzerland today, citing the

"[But] fears the Eurozone debt crisis could spread from Ireland have continued to support gold."

Due to outline today the four-year austerity package needed for a €90 billion EU/IMF bail out, the Irish government last night moved to take a majority stake in Bank of Ireland – the last Irish lender free from state control.

By lunchtime today, Bank of Ireland's shares had already repeated Tuesday's drop of 23%.

The gold price in Euros today held above €33,000 per kilo – a level seen only once since the record peak of €33,800 hit during June's Greek deficit crisis.

Showing a strong, positive correlation with the Dollar gold price of +0.50 during the first 10 years of its existence, the Euro currency has since shifted to a near-perfect non-correlation of +0.09 in 2010 to date.

That figure would read 1.0 if they moved absolutely in lock-step against the Dollar. At the height of the Greek deficit crisis, gold's correlation with daily swings in the Euro's Dollar-exchange rate sank to minus 0.91 – a strongly negative relationship – as gold rose but the Euro fell.

"Since the Eurozone is committed to austerity, its only recourse is protectionism," says Lord Skidelsky, urging greater government spending rather than quantitative easing.

"Meanwhile, China's policy of slowly letting the Renminbi rise against the Dollar might well go into reverse, provoking US protectionism.

"The Euro will become progressively overvalued [as the United States inflates], just as the Gold Standard bloc was in the 1930s."

"There's a lot of concern that the United States intends to inflate away their problems," says investment author and First Asset portfolio manager John Stephenson, speaking to the Globe & Mail.

"You want to hold gold if that scenario unfolds. If there's any time to buy gold, it would be now."

"The supply of money is beating out the supply of gold, driving prices higher," agrees Barry Cooper at CIBC, the $24 billion Canada-based banking group, in a new 109-page report.

Predicting further inflation in the global money supply "for the foreseeable future", Cooper raises CIBC's gold price forecast for 2011 and 2012 to $1600 and $1700 per ounce respectively.

"I worry that monetary discipline and confidence in the inflation target risks being eroded by keeping emergency settings for monetary policy in place for too long," said lone Bank of England dissenter Andrew Sentance in a speech this morning in Belfast.

UK interest rates, after inflation, have now been negative for 28 consecutive months, the longest (and only) stretch since the mid-1970s.

The gold price in Sterling has doubled since UK real rates went below zero – delivering a net loss of purchasing power to savers – in July 2008.

"With the economy recovering at home and abroad, inflation above target and set to rise further, I believe there are...powerful arguments for a gradual rise in interest rates," said Sentance this morning.

By Adrian Ash

BullionVault.com

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 www.BullionVault.com , 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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