By From Adrian Ash
As “Hot Money” Flows Force “Competitive Devaluation
THE PRICE OF BOTH gold and silver bullion spiked sharply at the start of New York dealing on Friday, briefly nearing yesterday’s record levels as Federal Reserve chairman Ben Bernanke spoke on monetary policy, and the US Dollar sank.
Failing to detail the size of quantitative easing now due – and admitting that policy-makers lack “experience” of its economic effects – Bernanke confirmed that the Fed is “prepared to provide additional accommodation if needed to support the economic recovery,” in a speech on Boston.
Gold prices leapt to $1384 and silver touched $24.80 per ounce as the US Dollar fell towards new 2010 lows vs. the Euro.
The Dollar also re-touched Thursday’s new 15-year lows to the Yen, but then rallied hard – alongside European equities and US stock futures – as gold and silver retreated.
New data meantime showed US consumer prices holding flat last month (excl. food and fuel) despite a near-5% fall in the Dollar’s international exchange rate.
US retail sales showed a better-than-expected rise.
“Investment demand has become an essential component within the gold market,” says the latest Metals Quarterly from Patrick Artus’ team at French bank and London bullion dealer Natixis.
“While fears of recession, if not deflation persist, and while major central banks remain prepared to expand their balance sheets further through an additional round of quantitative easing, gold prices will continue to be supported.
“Competitive devaluation…is equally supportive for higher Gold prices.”
A day after the central bank of India was seen buying Dollars and selling Rupees in the open market, “Heavy foreign fund flows” today buoyed the currency to a 25-month high vs. the Dollar, says the Economic Times.
So-called “hot money” is also pouring into China, a Beijing official is quoted today by the People’s Daily.
The Obama administration in Washington is set to announce whether or not it believes China is a “currency manipulator” deserving trade sanctions.
“What could ultimately undermine gold’s allure would be a gradual return to economic normality, as sovereign entities bring their financial houses back into order through fiscal retrenchment rather than monetary expansion,” says Natixis.
Shorter-term, “Gold doesn’t look overextended” with regards to speculative buying on the New York derivatives markets, says Walter de Wet at Standard Bank in a note today.
Comparing the “net long” position of non-industry players against the total number of open contracts in various commodity markets, “Silver has a net non-commercial long position as percent of open interest of 26.4%,” he says, “well above the average of 21.8% seen over the past two years.
“Nymex crude’s position is at 7.12%, compared to a 2-year average of 4.6%. The much less liquid Comex copper spec’ position as percent of Open Interest is currently 15%, compared to a 2-year average of 9%.
“The similar figure for gold is 32.4%, compared to a two-year average of 32.6%.”
The Gold/Silver Ratio fell Thursday to a new 26-month low, meaning that one ounce of gold was worth a little over 56 ounces of silver.
“The market remains bullish gold,” says technical analyst Russell Browne at bullion-bank Scotia Mocatta, “but we are not ready to pick the bottom on this great bearish [Gold/Silver] ratio trade.”
Adrian Ash
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Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
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