Quantitative Easing Will Boost Inflation and Gold Price
Commodities / Gold and Silver 2012 Feb 09, 2012 - 09:00 AM GMTBy: Adrian_Ash
The WHOLESALE MARKET gold price slipped 0.6% to $1730 in London on Thursday morning, regaining most of that dip as the European Central Bank kept its key lending rate on hold and the Bank of England extended its purchases of UK government bonds to £325 billion ($515bn).
When completed, this new Quantitative Easing will see the Bank hold nearly one-third of the UK's outstanding national debt.
"The growing consensus among central bankers is that their experiment with QE is still working," wrote Gavyn Davies, now of Fulcrum Asset Management and previously a policy advisor to the UK government, as well as head of global economics at Goldman Sachs until 2001 and chairman of the BBC until 2004, in the Financial Times on Wednesday.
"It was a shot in the dark, and a rather desperate one at that. But up to now it has had the desired effect, which is certainly a far better outcome than the alternative."
"The Bank of England's latest round of quantitative easing is likely to increase the risk of higher inflation," said World Gold Council director Marcus Grubb to Reuters, "and prompt investors to seek assets, such as gold, which can act as a hedge against rising prices."
The gold price for UK investors today slipped 0.5% to £1093 per ounce as the Pound rallied.
Since the Bank of England began quantitative easing 3 years ago, gold has risen 70% for Sterling investors.
"Continued optimism over Greece is supportive of gold," said one London dealer this morning, noting the recent link in daily moves between the gold price and the European single currency vs. the Dollar.
"There is agreement on all the issues bar one," said Greek finance minister Evangelos Venizelos to reporters in Athens today, claiming that only state pensions remain under discussion in budget cuts demanded by Greece's EU partners and the International Monetary Fund in return for their €130 billion ($172bn) bail-out.
Greek unemployment has risen to 20.9%, the Statistical Authority said today. A large chunk of Greece's outstanding debt is due for repayment on March 20th.
Holding UK rates today at a record low of 0.5% for the 36th month in succession, the Bank of England announced a shift in its purchases of government debt, targeting more 3-15 year maturities than long-dated gilts.
Twenty and 30-year gilt prices fell on the news, nudging interest rates higher, but shorter-term UK debt rose sharply, knocking the annual yield offered to buyers of 5-year gilts back down towards last month's record lows beneath 1.0%.
UK inflation over the last 5 years has averaged 3.2% per annum. The Bank's official target is 2.0% per year.
Back in the gold bullion market, "Everyone is in wait-and-see mode," Reuters quotes Ronald Leung at Lee Cheong Gold Dealers in Hong Kong.
"We don't see much scrap [supply] and buying has cooled after prices rebounded. [But] Greece seems to be closer to a concrete deal, which weighs on the Dollar and helps [the gold price]."
Keeping its key lending rate at 1.0% again on Thursday, the ECB will this month repeat its unlimited offer of 3-year loans to Eurozone banks, an offer which drew demand of nearly half-a-trillion Euros in December.
Many analysts expect demand to top €1 trillion on Feb. 29th.
By Ben Traynor
BullionVault.com
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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.(c) BullionVault 2012
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