By From Adrian Ash
As China Tightens, Ben Bernanke Cites “Deflationary Policy” of Great Depression
THE PRICE OF GOLD fell hard from a second attempt to breach $1360 per ounce in London trade on Friday, heading for its fourth weekly loss over the last 3 months for Dollar investors on what one trader called “a rollercoaster day” for precious metals.
Both commodity markets and European stocks fell hard – but silver bullion whipped around 1-week highs above $27 per ounce – after Beijing announced further monetary tightening in China.
The Euro slipped from a four-day high on the currency markets, as German and French officials linked any bail-out package for Dublin to demands for a rise in its corporate tax rate – currently the lowest in Western Europe.
The gold price in Euros fell to a two-week low beneath €31,800 per kilo.
“Gold still remains under pressure in regards to year-end-profit-taking as well as under the threat of a stronger Dollar,” says Swiss refiner MKS’s finance division.
“The brief dip in gold prices overnight, prompted by rumors of a Chinese rate hike, highlights the sensitivity of precious metals to news related to global liquidity,” says today’s note from Standard Bank.
Widely expected to raise interest rates this week, the People’s Bank of China in fact raised the “reserve ratio” required of commercial banks today, forcing them to keep back greater volumes of depositors’ cash to crimp new lending growth.
South Korea meantime added a 14% “withholding tax” to foreign earnings on its government bonds, hoping to control what it called “currency volatility” spurred by inflows of yield-hungry investment.
The US Federal Reserve, in contrast, today cut its Christmas-season lending rate to smaller US banks from 0.25% to 0.20%.
“It would be desirable for the global community…[to] provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits,” said Federal Reserve chairman Ben Bernanke in a speech to the European Central Bank’s 6th annual Central Banking Conference in Frankfurt this morning.
“Countries of the world must recognize their collective responsibility for bringing about the rebalancing required,” said Bernanke, highlighting a chart showing India’s Rupee rising by 11% as it accumulates ever-greater foreign currency reserves thanks to its growing export surplus.
On the same chart, the Chinese Yuan has barely moved, despite building a record hoard of $2.5 trillion in FX reserves.
“This problem is not new,” the Fed chairman went on, noting how France and the United States failed in the late 1920s to allow inflows of gold bullion to “feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued.
“These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.”
Even as short-term US rates remain at zero, “gold prices [are] at risk of being undermined by a rise in long-term interest rates,” says the latest Commodities Weekly from French bank and London bullion dealer Natixis.
Noting the near-half-point rise in 10-year US Treasury yields since the Federal Reserve announced a further $800 billion of quantitative easing, “This in itself raises the 10-year forward price of gold by $83 per ounce,” says the bank’s research team, because the ‘cost of carry’ in undelivered positions includes interest payments.
“Despite the $35 fall in spot gold prices [since Nov.4], 10-year forwards are higher by $30,” it says.
“This interaction between spot gold prices and long-term interest rates is crucial to an understanding of the dynamics behind gold,” Natixis says. “A rise in inflation expectations may indeed push gold prices higher, but it is in large part the longer-term forward price of gold which rises as a result of the increase in interest rates.
“Moreover, once this increase in interest rates is large enough, the spot gold price [for immediate delivery] can begin to fall,” with the forward premium coming at the expense of near-term prices, rather than being added on top.
Shorter term, “Gold made a nice recovery [Thursday] but ran into the old bullish trend line [at $1360],” says the latest technical analysis from Russell Browne at Scotia Mocatta.
For silver prices, on the other hand, “the 3-month [up]trend line held the last two days at 25.00, so the bull trend remains our friend.”
Adrian Ash
Gold price chart, no delay | Buy gold online at live prices
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.
(c) BullionVault 2010
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.
Comments