By From Adrian Ash
On Negative Real Rates, Spain Calls for Joint-Euro Fiscal Policy
THE PRICE OF physical gold bullion in large, wholesale-market approved bars traded near 3-week highs in London on Thursday, holding within 1% of yesterday’s new all-time records for Euro and Sterling investors as world stock markets rose alongside commodities.
Silver bullion prices ticked back down to $28.40 per ounce.
Agricultural commodity prices rose sharply, with wheat hitting a 3-week high and palm oil reaching a 28-month peak.
“With the current round of [US quantitative easing] set to end in June 2011, and our US economics team now forecasting strong US economic growth in 2011 and 2012, we expect US real interest rates to begin to rise into 2012,” says a new bullion report from former investment-bank Goldman Sachs.
That will “likely” cause gold prices to peak, perhaps above $1750 per ounce, Goldman’s analysts write.
To defend against prices fall in the meantime, they advise clients to sell both call and put options on gold. Because generating income from selling other investors the right (but not the obligation) to buy the client’s position at either higher or lower prices, this strategy is “especially appealing in the current environment,” says Goldman Sachs.
“Like the US, real short-term interest rates remain negative [after inflation] in China,” notes Walter de Wet, chief commodities analyst at Standard Bank today.
“Low real interest rates support gold demand. As long as this is the case, we expect China’s demand for gold to rise.”
Chinese gold imports have already risen to 209 tonnes this year, said Shanghai Gold Exchange chairman Shen Xiangrong at a conference today.
That compares with 45 tonnes imported during all of 2009. China is the world’s No.1 gold mining nation, with exports restricted by Beijing.
Gold investment demand in China, over and above record levels of jewelry demand, could reach 150 tonnes this year, reckons World Gold Council director Albert Cheng – also speaking in Shanghai today – more than 40% ahead of 2009.
“We note that there is likely to be illegal gold exports and imports from and to China,” says de Wet at Standard Bank. “This would distort the actual gold numbers for China.
“However, the trend is undeniable – gold demand in China is rising rapidly.” (See just how rapidly China’s Buying Gold here…)
Overnight in Asia, silver and gold dealing was “quiet” according to one Hong Kong trader, as speculators awaited both tomorrow’s US jobs data and, first, today’s monetary policy announcement from the European Central Bank.
“Privately, Italy, Spain and Portugal have pushed for strong and decisive action from the central bank,” officials apparently told the Wall Street Journal.
“[It’s] more than reasonable” for the ECB to buy Spanish government bonds, says Madrid’s industry minister Miguel Sebastian, quoted by the Efe newswire.
Buying government debt with newly created money is “within the orthodoxy” of central-bank policy, he believes.
But “The risk of disappointment at today’s [ECB] pronouncements looks to be writ in rather large neon-sign style lettering,” reckons Marc Ostwald at Monument Securities.
“Failure to do something will see the crisis return in force,” says Societe Generale’s Kit Juckes, also in London. But buying government debt without soaking up an equal quantity of cash from bank balance-sheets “would surely lead to a big sell-off in German Bunds,” warns other SocGen colleagues in a separate report.
“It’s not enough to have a single monetary policy. We also need to have a common economic policy. We need to have a much more integrated fiscal policy,” said Spanish prime minister José Luis Rodriguez Zapatero to CNBC on Wednesday.
“It’s not enough just to have a central bank, a single central bank.”
New data released by the US Federal Reserve on Wednesday, which detailed the banking taking emergency loans from the $3.3 trillion it lent amid the worst of the global financial crisis two years ago, showed Swiss bank UBS and UK bank Barclays heading the list.
“We’re finally getting to understand the role of the Fed in the world,” says senior fellow at Boston University and finance author Perry Mehrling.
“Has the Federal Reserve become the central bank of the world? I think that is a question that needs to be examined,” says Bernard Sanders, the independent US senator for Vermont who added the Fed disclosure requirement to the post-crisis Dodd-Frank Act.
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.
(c) BullionVault 2010
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