By From Adrian Ash
As US Bonds Signal Inflation Amid 2011’s “Race to the Bottom” in Currencies
THE PRICE OF GOLD reversed an early 0.8% dip to trade above $1387 per ounce on Thursday in London, as the Dollar slipped following a surprise jump in new US jobless claims.
Crude oil ticked lower from Wednesday’s new two-year high, but silver prices also rallied after giving back half of this week’s 4.1% gain vs. the Dollar, turning higher from $29.16 per ounce.
Overall, European stock markets were flat as the Pound and Euro both rose following “no change” decisions from their central banks.
The gap between two-year and 30-year US Treasury bond yields meantime widened to record levels – showing “that inflation expectations are rising” according to RBC fixed-income strategist Peter Schaffrik – as bond traders awaited today’s sale of $13 billion in new US debt.
“2011 is shaping up as a race to the bottom for currency values,” writes Harvard professor Kenneth Rogoff in today’s Financial Times.
“No wonder gold has been so attractive.”
Calling Eurozone economic policy “so incoherent…it is hard to know where to begin,” Rogoff says the Euro is likely “to succeed in hugely under-performing” other currencies this year, because the citizens of Greece, Ireland, Portugal and Spain “cannot be asked to suffer recession indefinitely so that foreign creditors can be repaid.”
The Bank of England and European Central Bank both voted today to keep their key interest rates on hold at record-low levels.
South Korea’s central raised its lending rate to 2.25%, however, saying that Asia’s fourth largest economy will continue to grow “even in the presence of external risks”.
After the Swiss National Bank said last week that it no longer accepts Portuguese government bonds as collateral for lending to banks, research by the FT‘s Money Supply blog today showed the Bank of England refusing only Greek government debt.
“We grew by twice the European Union average,” noted Germany’s economic minister Rainer Bruederle on Wednesday, after new figures said the Eurozone’s largest economy grew by 3.6% in 2010.
German wholesale prices jumped 1.8% last month from Nov., new data showed Thursday, rising more than 9% on average from a year earlier.
The gold price in Euros today reversed the last week’s 2.2% gain, however, retreating below €33,700 per kilo after Spain and Italy successfully sold €9 billion of new government debt between them, albeit it at sharply higher interest rates from their previous bond auctions.
“Yesterday’s successful Portuguese bond issuance has stalled the recent rally in precious metals, as risk aversion eases and safe-haven demand dissipates,” writes Leon Westgate at Standard Bank.
“Profit taking – exacerbated by reduced risk aversion – [also] prompted a strong sell-off of silver…Lower prices however might entice physical buyers placing a floor on silver’s fall.”
“It seems hard to avoid the conclusion that higher global food prices, higher emerging market inflation, and weak developed-market currencies won’t create some sort of increase in inflation,” says Westgate’s colleague at Standard Bank, chief currency strategist Steven Barrow.
“This scenario is best revealed by the Bank of England’s predicament. For here it seems that stagflation is the biggest threat, not deflation.”
British savers looking to start gold investing today saw the price slip to new 5-week lows at £874 per ounce after Sterling rose following the strongest UK manufacturing-growth data in 15 years.
The Bank of England meantime kept its key interest-rate unchanged, holding the cost of short-term bank finance at an all-time low of 0.5% for the 22nd month in a row.
Allowing for inflation – and with Bank of England rates held again at 0.5% today – real UK interest rates have fallen over the last year to their lowest level since 1978, averaging 4.2% below the pace of retail-price rises.
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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