By: Adrian Ash, BullionVault
London Gold Market Report
THE PRICE of gold investment bullion held near Wednesday’s new all-time Dollar highs in London trade this morning, rising toward 3-week highs in Euro terms even as the European Central Bank made good on its promise to raise Eurozone base rates.
The ECB’s move came despite a formal bail-out request late yesterday from Portugal, currently under a caretake government and with a sovereign budget deficit equal to 8.6% of gross domestic product for 2010.
Western stock markets ticked lower early Thursday with crude oil, but government bond prices rose, nudging longer-term interest rates lower.
Silver prices held firm around $39.50 per ounce – a new 31-year high when breached Wednesday morning.
Claiming to be “ahead of the curve” today, ECB president Jean-Claude Trichet repeatedly stated his “core mandate” of providing “price stability for 331 million people” across all 17 nations in the single Euro currency union.
Set today at 1.25% per year, the cost of ECB loans for commercial banks remains sharply negative in real terms at less than half the pace of inflation pegged by the EuroStat data agency for March.
“We have lately been struck by the decline in gold’s sensitivity to fiscal crises among Europe’s peripheral economies,” says the latest weekly commodities analysis from French bullion and investment bank Natixis, noting the recent “strengthening” of the Eurozone’s EFSF stability fund.
“Investors no longer appear to be so concerned that defaults among Europe’s periphery will impact core countries…European investors have not been major buyers of gold since 2009, but given the volumes accumulated between 2008-9, there is increasing scope for some of this gold to find its way back onto the market.”
Gold investment through exchange-traded trust funds (ETFs) has fallen 4% by volume so far in 2011, according to Natixis’ math.
Gold futures trading by bullish money managers and investors has also fallen, with the “net long non-commercial” position dropping by 30% since Oct.
“Moms and dads are moving out, out of gold and into equities,” reckons Jonathan Barratt of Commodity Broking Services in Sydney, speaking to Reuters.
“But our expectation for gold moving higher has more to do with inflationary concerns, I think, particularly in China.”
Here in London, the Bank of England kept its key lending rate at a record low of 0.5% for the 25th month running on Thursday. On the latest UK data, that puts the real rate of interest – after Retail Price Inflation – at a negative 5.0% per year.
UK investors wanting to buy gold today saw the price rise £3 per ounce to £895, just shy of Wednesday’s four-month highs.
Earlier in Tokyo, the Bank of Japan held its key interest rate below 0.1%, surprising analysts with a further ¥1 trillion loan ($11.7bn) to the country’s earthquake-struck north-eastern region.
That takes the Bank of Japan’s total monetary response to the March 11th disaster to the equivalent of $394 billion.
The gold price in Japanese Yen pushed higher to fresh 28-year highs in Tokyo trade on Thursday.
“The most important issue here is Spain,” said Gabriel Stein, director of Lombard Street Research, commenting on the Portuguese bail-out for BBC radio on Thursday morning.
Spain, Greece, Ireland and Portugal make up less than 18% of Eurozone economic output, said Stein, but their banking sectors “are wholly dependent” on liquidity loans from the European Central Bank, accounting “for something like 60%” of the total.
“This [ECB rate rise] will hit them immediately.”
Some 85% of mortgage borrowers in Ireland and Spain are on variable rates, according to the European Mortgage Federation. That rises to perhaps 99% in Portugal, says the FT‘s Alphaville blog.
“Permanently negative real interest rates distort world financial markets dangerously,” writes Anders Åslund, a senior fellow at the Peterson Institute for International Economics.
Blaming the current “oil price shock” on sub-zero real rates across the world, “Central banks should face reality and raise their rates faster and higher,” says Åslund.
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 World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2011
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