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Gold 2009 Trend Unknown Due to Global Deflation and ZIRP

Commodities / Gold & Silver Dec 19, 2008 - 09:25 AM GMT

By: Adrian_Ash

Commodities Best Financial Markets Analysis ArticleTHE SPOT PRICE of gold tumbled in Asia and London on Friday morning, sliding $42 from yesterday's top – and cutting this week's gains by four-fifths to 1.5% – as stock markets also sank despite fresh rate cuts from the world's No.3 central bank.


The Bank of Japan – still pushing on a string after 14 years of trying to fight a deflationary recession with its Zero Interest-Rate Policy (ZIRP) – today reduced its overnight loans rate from 0.3% to 0.1% in the hope of stopping the Yen from surging further on the forex market.

But the Japanese currency only rose again in early trade, cutting one-half off this week's bounce in the Euro vs. the Yen. Priced against Dollars, the Euro meantime slipped to $1.40 – down more than 7¢ from yesterday's 11-week high.

French, German and Italian investors wanting to Buy Gold today saw the price hold just below €600 an ounce – a level first broken in January and 2.5% down for the week.

Looking ahead to the Gold Price in 2009 , "How it will perform if the world enters a period of severe deflation is really unknown," says the Virtual Metals consultancy in London in its latest Fortis Metals Monthly .

"The historical precedents are few. During the Great Depression [of the 1930s], the Gold Price was fixed nominally and so naturally rose. The more recent Japanese deflation was by definition regional only."

But "what seems more certain," the report concludes, setting a short-term range of $760-$875, "is that when economies do recover – and need to deal with the legacy of the current monetary easing – gold should perform better as the threat of inflation returns with a vengeance."

As the Bank of Japan voted 7-to-1 to match this week's record-low interest rates from the US Fed, the Tokyo government also moved to buy ¥20 trillion ($223bn) of stock-market shares held by Japanese banks.

"The government's purchase will prevent banks from selling their stockholdings in the market and creating oversupply," reckons Hideo Arimura, manager of $1.9bn at Mizuho Asset Management.

Here in London, new broke that the Royal Bank of Scotland used the tax-funded "special liquidity scheme" to raise £34 billion ($51bn) of new funds, securitizing mortgages and selling them to the Bank of England in lieu of private-sector demand.

The FTSE100 index slid 2.2% meantime. Tokyo's Nikkei closed the day 1% lower.

"Looking ahead," says Steven Barrow from the currency desk at Standard Bank, "we do not see the [Bank of Japan] rate cut undermining the Yen at all. We still look for a move to ¥80 or lower against the Dollar in 2009."

"The stronger Dollar has pushed the precious metals lower," adds today's precious metals note fro Mitsui – also in London – "with support for gold being found this morning at $835.

"If this breaks, the next technical support level could be the 100-day moving average at $805."

But "a dip in Gold Prices will give a good buying opportunity for investors seeking a safe asset amid a global recession," says Tatsuo Kageyama at Kanetsu Asset Management in Tokyo, speaking to Bloomberg by phone.

"Gold is pausing after climbing rapidly on investment demand bolstered by US monetary policy."

While Gold Bullion slipped further ahead of Friday's New York opening, the broad commodity indices sank yet again, dragged lower by crude oil sliding beneath Thursday's new 55-month low of $35 per barrel.

"World crude oil prices are currently driven by barrels of crude in Cushing, Oklahoma," reckons one analyst – referring to the huge US stockpiles that swelled by 21% last week, signaling a glut of supply – "rather than the Opec announcement of a 4 million barrels a day cut to output."

Buoyed by the Deflation Trade once again, government bond prices rose across Asia and Europe on Japan's fresh cuts to interest rates, pushing the yield offered by 6-month UK gilts down to 0.5%.

The British Pound bounced 2¢ against the Euro from yesterday's fresh all-time record low at €1.05.

The Gold Price in Sterling retreated 3% from Thursday's new record high above £574 an ounce.

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 2008

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.

Adrian Ash Archive

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