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July 21, 2009

London Gold Market Report
by Adrian Ash

Gold "Cautious" as Fed Delays Exit Plan, Debt Monetization Risks "Inflationary Escalation"

THE PRICE OF GOLD ticked back above $950 an ounce Tuesday lunchtime in London as US stock futures pointed higher for the 7th session running.

Government bond prices slipped. Crude oil ticked higher above $64 per barrel.

European stock markets added more than 1% on average.

"Oil, stocks and currencies are all favorable for gold," said Ronald Leung of Hong Kong's Lee Cheong Gold Dealers to Reuters this morning.

"The economy seems to be stabilising, making people think about inflation."

Today the US Fed chairman, Ben Bernanke, is widely expected to address the issue of reversing the central bank's historic $1 trillion cash injection and money-creation when he begins two-day testimony before the Senate Banking Committee at 10:00 EST.

Writing today in the Wall Street Journal on "The Fed's Exit Strategy", Dr. Bernanke outlines four options for removing what he calls "excess liquidity", but adds that "Economic conditions are not likely to warrant tighter monetary policy for an extended period" - echoing a speech by Atlanta Fed president Dennis Lockhard on Monday.

"Slack in the economy will suppress inflation. And inflation is unlikely to result by direct causation from the recent growth of the Fed's balance sheet," Lockhart told his audience in Nashville.

Today's Gold Trading would be "cautious" ahead of the Fed chairman's appearance in Washington, Asian and London dealers agreed.

"If debt monetization is not reversed in the longer term," says a note from Swiss refinery and metal-dealing group MKS, "the economy will be threatened by inflationary escalation, which will prove highly supportive for Gold Bullion."

Bernanke's colleague at Princeton University, Lars Svensson of the Swedish Riksbank told Dow Jones Newswires overnight that he's "not concerned about monetary policy getting too expansionary now."

Judged to be highly influential in policy-making worldwide, Svensson last month cut interest rates for Swedish banks using the Riksbanken's deposit facility to minus 0.25%.

"There is nothing strange about Negative Interest Rates. [It means] we can consume, invest and import more," he says - signaling an intention to push down the Swedish Krona's exchange-rate value.

"In order to counter [the deflationary] threat, most central banks have cut rates to the bone," notes forex strategist Steven Barrow at Standard Bank here in London. "To ease further they have had to resort to other policies, like Quantitative Easing.

"One other option is currency weakness," he says. And into the group of central banks "who are not making public their quest for currency weakness, but whose actions suggest this is exactly what they want...we can put the Fed."

Early Tuesday the US Dollar bounced from yesterday's 10-week low on its trade-weighted index, gaining almost 1% against the British Pound as the UK reported a sharp jump in government borrowing.

Rising twice-as-fast last month as in June 2008, public debt outstanding reached a record £799 billion ($1.3 trillion) - the greatest proportion of GDP at 56.6% since official records began in 1974.

The Bank of England's own quantitative easy program has now monetized one-sixth of the UK government bonds issued so far this year.

The Gold Price in Sterling bounced hard on today's news, coming within 50p of yesterday's 5-week high at £579 an ounce.

Eurozone investors looking Buy Gold saw the price hold steady at €668.

Studying the Dollar value, "Gold Price action is bullish having finally taken out our critical 943 resistance," says a technical note from London market-makers Scotia Mocatta.

"The 943 area had held on 9 separate days since breaking lower on June 12. Now that we are above this level, we believe that it will act as strong support on any pull back."

"Gold has run into strong resistance [however] on approaching $960," counters Walter de Wet for Standard Bank's commodities team. Still advising gold-holders to sell into strength, "There is almost no buying in the physical market at levels above $955," he adds. "Gold is losing some momentum."

Meantime in the official sector - where renewal of the 5-year Central Bank Gold Agreement looks increasingly unlikely as the Sept. 26th expiry approaches - the Bank of Italy has been told the finance ministry's proposed "capital gains tax" will be capped at €300 million, according to a draft amendment seen by Reuters.

Part of the Italian government's hastily-drafted "Anti-Crisis Decree", the amendment is designed to deflect the European Central Bank's anger at the plan, said economy minister Giulio Tremonti.

The proposal sought to take as tax 6% of last year's capital appreciation in the Banca D'Italia's gold reserves - the fourth largest in the world.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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