Gold and Stocks Gain on China's $586 billion Economic Stimulus Package
Commodities / Gold & Silver Nov 10, 2008 - 08:31 AM GMTBy: Adrian_Ash
SPOT GOLD PRICES rose sharply during Asian and early London trade on Monday, adding 2.4% from last week's close as world stock markets also rose on news of a 4 trillion Yuan stimulus package ($586bn) from the Chinese government, plus an extra $40bn of US government aid for troubled insurance giant AIG.
"Although this stimulus package is a large amount of money, it constitutes only 2.3% of Chinese GDP," notes Walter de Wet at Standard Bank in his Gold Market note today.
"Spread over two years it is 1.15% of GDP per year. [So] while the package is a positive development, it is unlikely to be a quick fix for slowing growth."
China's Shanghai & Shenzen stock market closed the day 7.3% higher and Japan's Nikkei index added nearly 6%.
The central bank of Taiwan cut its key lending rate for the fourth time in two months.
The Reserve Bank of Australia – which has slashed its rates from 7.25% to 5.25% in the last eight weeks – today vowed "to avoid an unduly sharp weakening in demand" as it cut its 2009 growth forecast by one third.
AIG's latest dollop of US Treasury cash – offered in return for partial ownership – takes the insurance giant's government aid so far to a total of $150bn according to Reuters' math.
"Gold is boosted by the outlook that all these money injections by governments will sooner or later come into the market," said Ronald Leung, head of Hong Kong's Lee Cheong Gold Dealers, to Reuters this morning.
"Gold will go up, because it is the only money you can trust," agrees Michael Martin of the R.F.Lafferty brokerage in New York.
Tokyo Gold Futures added 2.9%, while the Japanese Yen – which had leapt by almost one-half since mid-July on the currency markets as the " Carry Trade " went into reverse – slipped 2.5% to ¥99.30 per Dollar.
The Euro gained 2¢ to the Dollar, capping the gains in Gold Prices for Eurozone investors at 1.4%.
Crude oil also rose sharply this morning, adding 6% to $64.50 per barrel after Chakib Khelil – president of the Opec oil carel – said that "if the price does not reach our objective of $70 to $90 per barrel, there will probably be another cutback [in output]."
Government bonds, in contrast, slipped back after last week's jump. The yield on 10-year US Treasuries rose four basis points to 3.83%.
"Focus on the front-end of the yield curve," advises Bill Gross, head of Pimco – the world's largest bond fund.
"The Fed will stay low for an extended period of time while the inevitable inflationary pressures of government bailouts lay further out on the yield curve."
This week the US Treasury Dept. will issue $55 billion of new debt in its regular quarterly funding drive – more than three times the volume of new debt issued in Nov. 2007.
"Gold is still range bound at $720-760," reckons the latest note from Mitsui, the London-based precious metals dealer, "as reflected by the sharply lower volatility at the end of last week.
"A period of consolidation may begin to attract investment back to these markets that have been well supported by physical demand in recent weeks."
Latest data from the US commodity futures regulator showed the total number of outstanding Gold Futures contracts shrank yet again last week, contracting by 2.1% to a 14-month low of 470,700.
Hedge funds and other "large speculators" grew their bullish betting for the first week in seven. A 29% jump in their bearish bets on the Gold Price , however, drove their net position to its least bullish since Sept.'s 15-month low at 69.9%.
Over in the retail Gold Market of India, meantime – destination for one ounce in every five sold worldwide last year – consumers are "buying with both hands" reports Daman Prakash Rathod, director of MNC Bullion in Chennai, in an email to BullionVault this morning.
"With Gold Prices below $750 and the Dollar exchange rate to Rupees below Rs. 48," he explains, "huge demand has erupted in the last five days, driving premiums charged for physical gold sky high.
"Almost every physical wholesaler is busy day and night."
Thanks to a good harvest this year, Rathod continues, "the money crunch so widely talked about elsewhere in the world is only urban gossip here. Rural farmers are buying the maximum gold [they can get] in India to store their savings."
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 2008
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