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Gold Safehaven as U.S. and UK Head for Bond Default and Devaluation

Commodities / Gold & Silver 2009 Jan 21, 2009 - 09:50 AM GMT

By: Adrian_Ash

Commodities The PRICE of WHOLESALE GOLD BULLION clung onto Tuesday's sharp 4% gains early in London today, adding to the "Obama Bounce" for Euro and UK investors while world stock markets fell for the ninth session in thirteen during 2009 so far.

"Gold experienced massive fund buying when New York markets opened" yesterday, notes Walter de Wet, senior commodities analyst for Standard Bank in Johannesburg.


"It rose $25 in less than 30 minutes. Stop-losses [for bearish Gold Futures traders] were triggered at $860, and gold eventually reached $866.50.

"At these levels, good physical selling set in, but was easily absorbed by the market. In New York, buying slowed down with Mr. Obama's inauguration."

( Just how big is the world's professional gold market? Get the Truth About Gold Pricing here... )

Today the Gold Price in Sterling leapt once again as the British Pound sank on the foreign exchanges, crushed by a fresh deluge of miserable data.

Growth in average UK earnings (incl. bonuses) slid almost 1% below the rate of inflation in Dec., whilst unemployment rose to 6.1%, a ten-year high.

The rate of new redundancies jumped to its fastest pace on the UK data agency's 12-year records, and government swelled by £44.21 billion – the worst monthly cash requirement ever – thanks to a futile injection of £20bn into Royal Bank of Scotland.

RBS has already lost a further two-thirds of its stock market value this week alone, despite a fresh £5bn injection of tax-payers' cash on Monday.

"[Both] the United States and the United Kingdom stand on the brink of the largest debt crisis in history," writes John Kemp, a columnist at Reuters, today.

"While both governments experiment with Quantitative Easing , bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs, and inflation to reduce the burden of debt to more manageable levels.

"Everything else is window-dressing."

The Pound Sterling today flirted with a 22-year low vs. the US Dollar near $1.37 and sank to new all-time lows vs. the Japanese Yen at €123.

UK investors seeking shelter by Buying Gold saw spot bullion touch £626 an ounce – up nearly 14% in just three trading sessions, and almost four times the price when Gordon Brown, now UK prime minister, launched Britain's Infamous Gold Sales in 1999.

Both US and UK government bond prices rose, however, as money continued to flee stock-market investments for the "safety" of sovereign debt. And meantime in Brussels, head of the European Central Bank (ECB) Jean-Claude Trichet told the European Parliament that "There is presently no threat of deflation."

Cutting Eurozone interest rates by just 0.5% to 2.5% last week – the highest amongst G7 leading economies – "What we are currently witnessing is a process of disinflation, driven in particular by a sharp decline in commodity prices," Trichet claimed.

The ECB yesterday tightened its rules for making "liquidity" loans to European financial institutions, demanding only those securities rated AAA when issued – and maintaining at least single-A status from then on – as collateral.

The Euro rallied after Trichet's EU testimony this morning, but held near 6-week lows vs. the Dollar at $1.2930.

"A globally synchronous and aggressive fiscal and monetary stimulus may be needed to re-inflate the global economy," writes Hussein Allidana, metals analyst in New York for ex-investment bank Morgan Stanley, "and we think this continues to present significant upside to Gold Prices .

"Devalued currencies, growing global incomes and a renewed appreciation for gold should keep prices higher."

Looking ahead for Gold in 2009, "investors [are] continuing to shift funds into allocated accounts from other instruments," notes the latest Gold Investment analysis from marketing-body the World Gold Council (WGC).

Describing the Shift to Physical Gold Ownership seen throughout 2008, investors "shied away from any counterparty risk whatsoever," the WGC adds.

"Many investors [also] started to get nervous about the inflation outlook. Fed policy action – including quantitative easing-type measures – coupled with further sharp interest-rate cuts around the globe, and the possibility of a large (and quick) fiscal stimulus package from the incoming Obama administration, [have] made many investors nervous about future inflation prospects, increasing demand for gold as a store of value."

In the near-four decades since world currencies were fully freed from all gold-backing, the WGC analysis notes, consumer-price inflation in the United States has topped 5% per annum nine times.

US and world stock markets fell in five of those years, rose in four, and recorded an average drop of 0.5% a year. Longer-dated Treasuries rose on average by 1.5% per annum (before inflation), whilst commodities rose 7 years out of the nine, averaging a 9% annual rise.

"But it was Gold that truly shone," the WGC says, "rising in six years, declining in three, and posting an average increase of 31%."

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 2009

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

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

rich
22 Jan 09, 08:29
bond default/ devaluation

I think John Kemp is correct in this article about upcoming upheeval. it don't look good any way you slice it !


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