Alan's Finance Blog

Gold & Silver Fall on US Jobs Data, But “Wealth Insurance” Needed as “Double-Dip Recession” More Likely

By: Adrian Ash, BullionVault

London Gold Market Report

THE PRICE OF GOLD and silver fell hard for Euro and Dollar investors Friday lunchtime in London, with gold unwinding this week’s 1.2% gains as world stock and commodity markets jumped in response to new US jobs data.

August’s Non-Farm Payrolls surprised analysts with a headline drop for August of 54,000 – half the losses expected – plus stronger-than-forecast growth in private-sector hiring, up by 67,000.

“The private sector has net created a total of 622,000 jobs since last November,” noted Deutsche Bank analysts ahead of Friday’s announcement.

“This is still fairly low compared to the 8.459 million private jobs lost during the previous two years.”

Overall, the US unemployment rate crept up to 9.6%, with average earnings rising more slowly than expected from a year earlier.

“[Gold] is what I call wealth insurance,” said Peter Hambro, mining-magnate and chairman of London-listed Russia gold miner Petropavlovsk Plc, to Bloomberg earlier this week.

“Everyone has health insurance, fire insurance…Gold is what is going to protect you from the ravages of government…There is no way out for these guys except to inflate away debt.

“I’m afraid that unless you have some real assets, you’re going to be in trouble.”

Elsewhere on Friday, new data showed Swiss consumer prices stayed flat in August, while German and UK service-sector growth was slower than expected.

Retail sales across the 16-nation Eurozone rose by 0.1% from July, the official data agency said – just half the tepid rate of expansion analysts forecast.

“The truth is that we have not had much of a recovery in the first place,” says New York professor and economics consultant Nouriel Roubini, writing for Forbes magazine, “which might prevent the economy from falling enough to display what many would label a double dip [in the US] – although we are now assigning a 40% probability to such an outcome.”

Back in the gold bullion market, overnight trading in Asia was “cautious” according to one dealer’s note, but the US jobs data promised “an exciting close to the week”, especially with New York heading into the long Labor Day weekend.

Over in Mumbai, “There are no [gold] deals at these rates,” said a state-owned bank dealer to Reuters this morning. “There is an initial resistance from traders to accept near-record prices.”

Gold prices for Indian consumers – the world’s No.1 buyers, now entering the strong post-harvest festival season – held just shy of recent records at 19,200 Rupees per grams on Friday.

Ahead of the peak gold demand typically seen during Dhanteras in November, “We are expecting festivals like Ganesh Chathurti and Navratri may bring in sales,” said another dealer.

A Reuters poll of 10 analysts and dealers says Indian gold imports (it has next-to-no domestic gold mining output) will rise 5% to 504 tonnes in full-year 2010.

Elsewhere in the commodities market, New York crude-oil futures jumped through $75 per barrel on the US jobs data, with the broad hard-asset indices reversing an earlier drop to show a 0.5% on the day.

“We are bullish on silver,” says the latest technical note from bullion-bank Scotia Mocatta, “looking for an eventual test of the 2008 high of $21.35 an ounce.

Silver traded wholesale in London today gave back 1.1% from a new four-month high at $19.76. Supporting its bullish stance, says Scotia, the Gold/Silver Ratio “broke lower” on Thursday through August’s bottom, meaning that one ounce of gold is worth fewer ounces of silver.

Moving down to 63.75, the gold/silver ratio looks bullish for Silver Prices while it remains “below 64.90,” says Scotia, “and we see April’s low of 62.66 as the next major [level].”

Adrian Ash

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 gold-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.

Speculating in Gold

By: Adrian Ash, BullionVault

Since gold stopped being money, it’s become 75% more valuable on average…

SO GOLD is now at “fair value” says Bill Bonner, long-time gold bug and my former boss/partner-in-crime at The Daily Reckoning’s London HQ.

No, he won’t sell yet…if ever…says Bill. But gold’s huge under-pricing a decade ago has clearly passed by. Value-hungry investors got their “reversion to the mean”, and in the form of 400% gains, too. What one ounce of gold bought 2,000 years ago – a good suit of clothes, in Bill’s oft-repeated example – it now matches, if not exceeds in price, here in late 2010.

From here, that makes it a “speculation”.

Never mind that, around the birth of Christ, all clothes were hand-cut and sewn locally…rather than glued together by the world’s cheapest labor, four or eight thousand miles away. A suitable outfit for visiting the coliseum or agora would have been made-to-measure, too…and today’s finest tailors, at least in London or New York, will ask much more than the $1240 you’d raise by selling one ounce at current “spot gold” prices.

Never mind all that. Because Bill’s point is well made, again…

Gold was a screaming buy at the start of last decade, sinking to its lowest price – in real terms – since the early ’70s, as the chart above shows (courtesy of the World Gold Council, and taken from Roy Jastram’s incomparable study, The Golden Constant).

But “Nobody cared! Nobody was interested,” as a (very drunken) London dealer cried at me late last year. “I’d email out jokes, porn-site links, anything to get clients reading so I could repeat three simple words: ‘Buy gold now!’

“But they didn’t care…I don’t even know if they looked at the porn…”

Today, in contrast, you can’t move for anxious investors and bullish hedge funds piling into gold. Or so the media coverage would make it seem. New gold dealers – online and on Wall Street – are meantime sprouting like fungus to catch the “retail dollar”, and the story’s grown so old, it’s even spawned its own calendar for financial hacks (the summer lull, India’s post-harvest festivals, quarterly data from the mining-backed World Gold Council, the Sept-end of each year of the Central Bank Gold Agreement). Wherever you look, the only debate that counts – “It must be a bubble, so when will it burst?” – rolls on for what is now more than two years.

As for the dumb lump of metal, yes – it continues to pull in new money, nudging its purchasing power ever-closer to the big top of 1980. But look again at that chart above. For while Roy Jastram saw a “golden constant” in his two centuries of US data (and four centuries of British gold prices), the shorter-term volatility is striking. Not least since gold ceased being money 39 years ago, and became mere trinkets and collectibles instead.

“In terms of what gold will buy, it does not seem undervalued to us,” Bill Bonner writes. “As near as we can tell, gold is now fairly priced.

“[So] the reward now is different. It is speculative…not inherent. We cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean.”

But what is gold’s mean purchasing power – the “golden constant” of Jastram’s peerless research? By our reckoning here at BullionVault today, it has risen sharply since the US abandoned its last pretence of a gold standard and floated the Dollar in August 1971. Compared with the first seven decades of the 20th century, in fact, gold’s real purchasing power has stood more than 75% higher on average. Which seems odd. Because without being used as money – its only utility beyond decoration – gold became only more valuable. So while its purchasing power may have looked “constant” across long historical periods from Roy Jastram’s vantage of 1977 (and again to die-hard gold bugs 20 years later), its utility had in fact changed.

Gold became more useful as a way of storing purchasing power, even though it was no longer money. Or rather, because it was no longer money, in an age where “Every morning, when you look in the mirror, I want you to think ‘What am I going to do today to increase the money supply?’…” as John Ehrlichman, assistant to Richard Nixon, apparently told Fed governor Charles Pardee, sometime in the early 1970s. Post-war economic policy across the West was haunted by the Great Depression, and thus flowed from the fear that, unless money was losing value, then spending and particularly investment growth would grind to a halt.

Without the spur of inflation, capital would choose to sit tight – in purses, pockets and deposit accounts – because its purchasing power today would be retained tomorrow. Savers could thus spend (or not) as they chose, rather than being forced to exchange or grow their money to realize or maintain its present value. Devaluing their money, in contrast, via persistent (and obvious) inflation would force savers into the stores and stock-broker’s office. And thus today’s targets for persistent (and obvious) inflation were born.

“[Harvard professor] Kenneth Rogoff is proposing that the United States use a burst of inflation to get out of its slump,” writes Princeton professor Paul Krugman. “I agree…[but] if central banks can gain any leverage at all, it’s only by credibly committing to inflation over a fairly sustained period…[not Rogoff's] two or three years of slightly elevated inflation.”

Bill Bonner’s bang on the money, in short. Gold from here is a speculation, but a speculation only on academics getting their inside man (whether Mervyn King in London or Ben Bernanke in Washington) to apply their latest hare-brained scheme – massive new money inflation.

What price gold’s utility as a store of real value if…when…they succeed?

Adrian Ash

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.

Gold Ignored & Dismissed by US Media as Good Harvest Points to Strong Indian Demand

By: Adrian Ash, BullionVault

London Gold Market Report

THE PRICE OF GOLD rose back above $1250 an ounce for the second time this week – and the sixth time since May – on Thursday morning in London, as government bonds ticked lower together with energy prices.

Soft commodities rose, as did base metals and platinum. Silver prices touched a new 16-week high at $19.57 an ounce.

In the US, an article from Forbes magazine highlighting “Six Ways Retirees Can Beat Inflation” today does not mention gold investing.

“Gold has doubled since 2006,” adds a personal-finance video at Yahoo.com, sponsored by the Fidelity fund group. “This train left the station a long time ago.

“So before you pour your savings into gold, be careful…A lot of the money’s already been made.”

Asian stock markets meantime closed Thursday 1.5% higher, but European shares stalled after Wall Street closed last night with its fourth-best one-day gain of 2010-to-date on what one London analyst called a “rather selective” reading of Wednesday’s global economic data.

UK house prices today showed their second month-on-month drop in a row, while British manufacturing also contracted.

Swiss GDP growth jumped however to 3.4% annually, and the 16-nation Eurozone also grew faster than expected, with GDP rising by 1.9% year-on-year to end-June.

Inflation in Eurozone factory-input prices jumped from 3.0% to 4.0% per year in July.

Today the European Central Bank voted to keep its key interest rate on hold at 1.0% for the 16th month running.

Sterling and the Euro both fell vs. the Dollar, nudging the price of gold bullion up to £812 an ounce and €31,380 per kilo respectively.

“The maintenance of easy monetary policies and the likely reintroduction of quantitative easing policies provide the rationale for stable if not higher gold prices,” says London market-maker HSBC in a note today.

Reviewing interest rates outside the US, Eurozone, Japan and UK, “Many policymakers seem to have been surprised by the strength of growth in Q2, but are also somewhat skeptical that the strong pace can continue,” says Standard Bank’s chief currency strategist Steve Barrow.

The Reserve Bank of Australia – where GDP growth has jumped to a 3-year high – last raised its key lending rate in May at 4.50%.

Sweden’s Riksbank today raised its lending rate to 0.75%, saying that GDP growth will improve and labor demand look “substantially” better.

Over in India on Wednesday – where GDP growth for 2010 is pegged at 8.2% by Goldman Sachs’ analysts – local gold prices reached new record highs above 19,230 Rupees per 10 grams, The Asian Age reports.

“Apart from bad economic news globally, a weak Rupee is also pushing up prices in India” – home to the world’s hungriest gold-consumer market – the newspaper says.

Going into the traditionally strong autumn gold-buying season, “Gold consumption is expected to be strong in India this year,” says Kuljeet Kataria at Motilal Oswal Securities in Mumbai, “because the monsoon has been good.

“That should lead to higher rural incomes – places where there is no [formal] banking.”

“This demand from emerging countries – if it’s really going to stop and fall off a cliff, it’s going to be because of economic developments, not high prices,” says US Global Investors’ Frank Holmes, speaking last night to South Africa’s MineWeb.

Worldwide, “Gold is basically looked and perceived more and more as a safe-haven investment,” he adds. “The US, Western Europe and Japan are close to buckling under the weight of their own sovereign debt issues, and government budget deficits remain large and persistent and, as a result, the major paper currencies are low.”

The world’s seven most populous countries also have the strongest “emotional attachment” to buying gold, notes Holmes.

“The gold price could go up further…going into the Labor Day weekend,” reckons Jeffrey Christian of New York’s CPM consultancy, speaking to TheStreet.com and comparing this year’s action “to some extent to August of 2007, when gold didn’t really take an August pause.”

Adrian Ash

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 – 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.

Gold Extends 2nd-Best Annual Rise to End-Aug. as Physical Silver “Gets Tight” in Hong Kong

By: Adrian Ash, BullionVault

London Gold Market Report

THE SPOT PRICE OF physical gold bullion touched its highest level since late-June’s record peak early in London on Wednesday, extending August’s record-high monthly close as world stock markets rose together with commodities and government bond yields.

New data showed rapid growth in Chinese manufacturing and Australian GDP.

Friday’s key US employment data was preceded however by the private-sector ADP Payrolls Report, which showed its first loss since March, down by 10,000 jobs against the 20,000 growth expected.

“We are in a bind,” writes Bill Gross of bond-fund giant Pimco in his new monthly outlook, urging fresh quantitative easing of mortgage-backed securities.

“Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending…crippling any hopes of a housing-led revival to the economy.”

The Dollar dropped to a 1-week low vs. the Euro on the news. The Dollar gold price retreated from $1254 to $1249 an ounce.

“[Last night's] $1247 is a new record-high monthly close,” notes Russell Browne in his technical analysis from bullion-bank Scotia Mocatta, “beating June’s $1241.

“Although gold price action is stepping up, we remain cautious around month end. [But] the bullish close increased the pressure for a test of the record high of $1265 and beyond.”

The gold price in Dollars ended Tuesday with its best August performance since 1986, gaining 6.6% for the month.

Year-on-year, last night’s record-high monthly finish saw gold stand more than 30% higher, its second-best August-to-August after 2006’s 43.9%.

“Gold convincingly broke through a downwards sloping trendline yesterday,” sayss a London dealer today. “The $1250 level now remains the last technical barrier to a return to the record highs of June.

“With September inflows expected, continued strength may be in store.”

“Also of note is a tightening in the physical silver market,” says Standard Bank’s senior commodity analyst, Walter de Wet, ”with increased demand from mainland China absorbing much of the silver supply traditionally coming to the wider market from Hong Kong.”

Silver bullion traded in London touched a 16-week high of $19.55 an ounce on Wednesday – a level last seen at May’s 14-month peak.

World stock markets meantime shot higher, with London’s FTSE-100 gaining 1.5% by lunchtime.

In Athens, short-selling of Greek stocks was again allowed today, with the main index trading some 12% below the level of late-April, when a ban on “speculation” was imposed.

Alongside the Euro and Sterling, the Japanese Yen also rose again on the forex market, edging towards last week’s 15-year highs at ¥83.70 to the Dollar despite Tuesday’s announcement of €11 trillion ($127bn) in new fiscal and monetary stimulus.

“Too little, too late,” is how former Bank of Japan policymaker Noboyuki Nakahara described it.

Faced with flagging export sales, “The [Tokyo] government is running out of policy options with interest rates this low,” says CLSA’s Greed & Fear analyst Christopher Woods in Hong Kong.

Reversing Tuesday’s losses, the three central-bank reserve currencies knocked the gold price back by 1% from near two-month highs at £816 per ounce, €31,687 per kilo and ¥3145 per gram respectively.

Adrian Ash

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-industry’s World Gold Council – 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.

Gold “Caught in Bind” as Stocks Fall, Fresh Easy Money Looms, Dow/Gold Ratio Falls

By: Adrian Ash, BullionVault

London Gold Market Report

THE PRICE OF GOLD held in a tight range as London re-opened after the Summer Bank Holiday on Tuesday, slipping $3 an ounce to $1235 as world stock markets fell again to near the end of August some 6% down on the month.

Silver prices reversed an earlier 1.5% drop to trade back at $19.12 an ounce.
“A disappointing day for precious metals,” says one Hong Kong dealer in a note.

“Despite its safe haven status, gold came off in tandem with stocks, re-visiting Friday’s low.”

The US Dollar slipped back against the Euro today, but crude oil dropped back through $74 per barrel and government bonds rose everywhere, nudging 10-year US Treasury yields back down to 2.50%.

“Gold is caught in a bind,” reckons Tokyo trader Kazuhiko Saito at Fujitomi, speaking to Reuters.

“Slowing growth and deflation worries are generally negative for commodities, putting a cap on gold prices. [But] at the same time, easy monetary policy continues to keep expectations alive that investment funds will return to gold, putting a firm floor under the market.”

A raft of better-than-expected data from Japan and Germany was outweighed according to several London analysts by Monday’s poor Personal Income stats in the US, where income-growth continues to lag price inflation.

The Bank of Japan said yesterday it’s injecting ¥10 trillion ($117bn) into commercial banking loans, with a further ¥920bn ($10bn) of economic stimulus promised by the Tokyo government.

But the Nikkei stock index still sank 3.6% on Tuesday, however, falling to a new 16-month low – even as the Japanese Yen eased back on the forex market – after New York’s Dow Jones Industrial Average closed Monday down 1.4% to finish just a few points above the 10,000 mark, unchanged from April 1999.

The Dow/Gold Ratio ended Monday down at 8.1, meaning it would take a little over 8 ounces of gold at current prices to purchase one unit of the DJIA.

The ratio peaked just shy of 43 ounces in Sept. 1999. Averaging 12 ounces since 1928 – and falling to record lows of two ounces and then one ounce in 1932 and 1980 respectively – the ratio fell to a 19-year low of 7.4 ounces in Feb. 2009.

“It is a data-heavy week,” says Walter de Wet at Standard Bank today, noting the release of manufacturing indices for all major economies, plus US jobless data on Friday.

“This could keep the market nervous…and US equities remain under pressure. The strength in US Treasury bonds is supported by expectations of possible bond purchases by the US Fed, and [we] view these expectations of further monetary easing as positive for gold.”

Meantime, says Standard Bank’s commodity team, “We continue to see gold buying in the physical market, although it has slowed. With gold closer to $1240 an ounce, there also appear to be some gold scrap-selling coming through.”

Tuesday morning’s sharp drop in Sterling pushed the gold price in British Pounds back above £800 an ounce – more than 8.4% above late July’s three-month lows.

Euro investors wanting to buy gold today saw the price tick back towards €31,300 per kilo, meantime, just shy of last Thursday’s eight-week highs.

In Germany this weekend, a row erupted over Dr Thilo Sarrazin, an executive member of Germany’s central-bank, whose new book – which accuses Muslim immigrants of being a drain on the economy – has shot to the top of the best-seller charts.

A former member of the Berlin Senate, Dr Sarrazin “has repeatedly and persistently made provocative statements, especially on issues relating to immigration,” the Bundesbank said in a press release on Monday, “categorically distancing” itself from his comments on Islam and “the Jewish gene”, and threatening to take “prompt action”.

Adrian Ash

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 – 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.

Why Gold Is Not In a Bull Market

What is a Bull Market?

What is a ‘Bull’ market?   It is a market in an upward price phase of a market with the expectation that it will be followed by a ‘Bear’ or downward phase of a market.   This mindset is common to all markets.   Sayings like, “everything the at goes up must come down” is pretty standard and taken as part of life itself, but few examine it to see if it is really true.   Why should everything that goes up come down?   For some years now gold has been thought of as moving in the opposite direction to the U.S. Dollar.   So if gold goes up it must come down must also mean that if the Dollar goes down it must come up?   Is that true?   The history of currencies in the last few thousand years tell us something quite different.   Currencies have gone down and never come up again, just disappeared.   Gold has always retained a monetary value.   Since the eighties to 1999, gold has gone down and in this century has gone up.   So we take issue with the saying, in the light of the history of gold.   Even though the ‘powers that be’ have tried to discredit gold and underlying money, the vast majority of central banks have retained most of their gold because they believed it to be a very valuable reserve asset.

What sort of Market is Gold?

A very accurate saying is doing the rounds at the moment, it is, “People buy gold, not to make money, but because they have money.”   This has always been true, because gold is the Ultimate Money!   Unlike commodities it is hardly consumed.   Lost yes, but not consumed as other metals and commodities are.   It is held as a measure of wealth by bankers, funds, individuals.

The gold market is important in the context of this subject too, because gold is not an ordinary market, it is different from any other.   It comes into its own when trust breaks down, when fear rises and confidence falls.   And pre-1971 it was always money.   This is important because the gold price has defined by a currency price since the early thirties.   Why do we say this?

Before then the price of a currency was defined by gold.   Each note of currency at one time was described as the number of ounces it represented.   It was a bill, a representation of the gold backing it.   It was a gold I.O.U.   Then the switch came mentally in the murky monetary days somewhere between the dropping of the gold Standard and the Nixon Administration’s floating of the gold price away from the Dollar.   Take a look at these two notes we have put here in the article.   Put your cursor on the corner of each in turn and enlarge them so you can read the writing.    You will see what we mean by a ‘bill’ representing gold.   Gold always had a role as money and now has a role in backing money as a reserves asset.  Roughly translated this means when push comes to shove gold will be money always.   It is this role, as money to a greater or lesser extent that makes it different to any other money.

The next question is how can money be in a ‘bull’ market?   It is a misnomer because it conveys the wrong concept to investors.

Is Gold in a ‘Bull’ market then?

No!   It is money that is in the long process of returning to the center stage of the monetary system.

While this happens, prudent individual and institutional investors are acquiring it, while they can, ahead of the devaluing of un-backed currencies.

We do not believe that the gold price is going to fall back below $300 an ounce and probably not below $1,000.   Gold will not enter a bear market by falling as equity markets are prone to do today.   It is not an item whose demand will fall away.   We expect that once its rise does plateau at some point it will remain at whatever level it reaches.   Many do feel that the current investment demand will peter out once confidence returns to un-backed currencies.   We find it more than difficult to believe that as we watch monetary authorities from the corners of the world moving to acquire more for their long-term reserves while worrying about the future of the currencies they have in their reserves.

Central banks have started to re-acquire it, while previous sellers of gold have stopped selling their gold.   [The I.M.F. managed to acquire 403 tonnes of it from its Members, but the balance of the gold held by the I.M.F. is held on behalf of its members and is not the property of the I.M.F. itself.]   Central banks are the very authorities that deemed gold to be money before they invented un-backed currencies.   As the world’s governments try to retain their international competitiveness by moving their exchange rates down, their role as a measure of value is being debauched.   This gives rise to the need for something to measure currencies against.   It will happen eventually, we believe in a careful process.   First we expect a basket of currencies to be used.   In time, gold will be introduced into that basket, if not from the outset.

Where do Central Bankers see Gold in the next 25 years and why?

By: Julian D. W. Phillips, Gold/Silver Forecaster – Global Watch – GoldForecaster.com

Gold Falls with Stocks & Euro as Yen Hits 15-Year High, US Fed Prepares Fresh Quantitative Easing

THE SPOT PRICE of wholesale gold dropped to a 7-session low Tuesday lunchtime in London, as world stock markets fell hard in thin trade and the Japanese Yen reached a new 15-year high vs. the Dollar.

“Monday was about as quiet as it gets,” says one London bullion dealer in a note.

“Lower gold [today] attracted only light physical interest,” a Hong Kong dealer adds.

Versus the Dollar, the British Pound fell to a 1-month low and the Euro hit a 6-week low on the forex market, stemming the gold price drop to £787/oz and €30,920/kg respectively.

Against the Yen, gold fell to a two-week low of ¥3270 per gram. The Euro dropped to its worst level since late 2001 at ¥105.50.

Silver meantime tested last week’s lows versus the Dollar, but hit its lowest level against priced in Yen since mid-March.
New data meantime confirmed Germany’s 4.1% year-on-year GDP growth for the second quarter, but industrial orders across the 16-nation Eurozone were weaker than analyst forecasts for June.

Ahead of this weekend’s Jackson Hole central-banking summit in Wyoming, the Wall Street Journal today reports that the US Fed is moving to expand its program of quantitative easing after a heated debate at this month’s policy meeting.

“We sent some garbled message about a weaker economy where we wanted to be more accommodative,” the paper quotes Charles Plosser, head of the Philadelphia Fed,

Despite Fed chairman Ben Bernanke preparing to increase the Fed’s $2 trillion balance-sheet by buying more bonds, “That was confusing and ran the risk of scaring the markets,” says Plosser.

Back in Tuesday’s action, “The losses on equity markets in Asia and Europe indicate that risk aversion is rising,” notes Standard Bank’s commodities team, but “this has not translated into the usual price increase for precious metals.

“Along with base metals, crude oil is bearing the brunt of the pessimistic global economic outlook.”

US oil futures contracts today slipped for the fifth session running, dropping to a 6-week low near $72 per barrel, after China reported a 3% year-on-year drop in July’s imports of crude.

G7 government bond yields meantime fell again as prices rose, driving the two-year US yield down towards last week’s record low despite the looming sale of $37 billion in new two-year debt.

Noting the seasonally thin trading volumes in stocks and precious metals, “It’s going to be choppy for the next one-and-a-half weeks,” reckons Afshin Nabavi, head of trading at Swiss refinery MKS’s Finance division.

Forecasting a strong recovery in physical gold demand, “The Indian festival is coming in and the funds will finish their holidays,” says Ronald Leung of Hong Kong’s Lee Cheong Gold Dealers, also speaking to Reuters.

But for now, however, it’s “imitation gold jewelry that is flying off the shelves in Mumbai,” reports Shivom Seth for Mineweb today.

“With gold prices testing multi-week highs and staying strong” against the Rupee, “physical demand has taken a beating, and consumers are preferring to opt for lower carats and for costume jewelry made out of 1 carat gold.”

As India celebrates the family festival of Raksha Bandhan today, “We had hoped that the demand for gold jewelry would see a major spike during this time,” says one Mumbai retailer, “since brothers and sisters buy gold jewelry as gifts for their siblings.”

But “The price of gold has risen by 25% in the past seven months…[and so] youngsters are buying 12-carat or imitation gold jewelry at cheaper prices.”

Adrian Ash

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 – 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.

‘Tis But a Scratch!

By: Adrian Ash, BullionVault

The bull market in gold is a long way from losing both arms and legs just yet…

WHATEVER FORCE you spy behind this week’s swoon in gold prices to $1160 per ounce and lower, ’tis but a scratch – a flesh wound – so far.

“I’ve had worse!” as Monty Python’s Black Knight says.

First, the current options contract on gold futures expired Wednesday, guaranteeing volatility. Because as bullish speculators moved to close and rollover their position in the derivatives market, those banks taking the other side of the trade were only too happy to oblige.

Call that manipulation if you must (double-check your facts first), but more broadly, long-time investors and traders would always expect to see a seasonal lull – if not drop – in gold prices between July and Sept. India’s gold-hungry millions don’t buy over the summer, waiting instead until autumn’s post-harvest Diwali festival. And after the huge gains spurred by the Greek crisis of April and May, a pullback in gold investment pressure looked due.

Of course, that’s not to say the gold bull-market starting a decade ago hasn’t just met its end. Some in the finance media would like to believe it’s over (even if, like this article at the Sydney Morning Herald, they seem more driven by resentment than analysis). But for now, recent history says the bull market in gold is a long way from losing both arms and legs just yet…

Dropping a little over 9% from last month’s top to date, the gold price in Dollars would have to reach $1073 an ounce before matching the 15% drops of Dec ‘09-Jan ‘10 and Feb-Apr ‘09.

Gold would need to hit $948 an ounce before matching the 25% drop of May-Jun ‘06. And it would have to reach $834 before matching the 33% Mar-Sept. loss of 2008.

This current swoon is also a good way from setting new records for pace, too. Top to bottom, it’s nothing – so far – next to the 16% week-on-week drops of June 2006 and Sept. 2008.

Western government deficits are set to keep rising, meantime, while real interest rates remain below zero everywhere, slowly destroying the value of cash. Gold, in contrast, continues to find favor with central-bank reserve managers, and private Chinese gold demand is undimmed.

Indeed, “with all the deregulation we’ve seen in China and the Chinese gold market being so alive, it may just turn out to become a bit of a casino atmosphere over there,” says gold-mining magnate Pierre Lassonde, speaking to MineWeb – “a gambling atmosphere [that] could very well push the gold price beyond anything that we believe is reasonable.”"

Small comfort to investors or traders picking early July’s dip as a bargain, perhaps. But so far, it’s only a scratch. And whatever nemesis gold has stumbled across in July, it’s certainly got nothing to do with the long-term drivers of its four-fold gains to date.

Adrian Ash

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 – 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.

Physical Buying “Supporting Gold” Amid Slow Summer Dealing

By: Adrian Ash, BullionVault

THE PRICE OF GOLD gave back an early rally on Monday morning to trade just below Friday’s close of $1190 an ounce amid what one Hong Kong dealer called “a typically slow summer day.”

“There is physical gold buying coming in as prices are below $1200,” said a Seoul-based trader.

“Physical gold demand is supporting the market towards the $1185 level,” said Afshin Nabavi of MKS Finance in Geneva, also speaking to Bloomberg.

“A lot of the interest we are seeing at the moment is from long-term investors, and we don’t see that abating,” the Wall Street Journal quotes Barclays Capital analyst Suki Cooper in London.

Dealing in Asian and European equities was also quiet early Monday, leaving London’s FTSE100 index unchanged from last week’s two-month closing high.

Crude oil slipped from an 11-week high near $79 per barrel. Major-economy government bonds rose, nudging the yield offered by 10-year US debt back below 3.00%.

Platinum and palladium both hit a 5-week high, some 3.6% and 13% higher for 2010-to-date respectively.

Silver prices slipped back from an early repeat of Friday’s one-week high at $18.33 an ounce, but held above $18 an ounce – some 6.6% higher for the year so far – as the start of US dealing approached.

“In technical terms, gold looks bearish,” says Walter de Wet at Standard Bank. “However, in the physical market, buying interest is providing support around this crucial range gold.”

Looking at the latest Commitment of Traders data from the US gold futures market, non-commercial “speculative” players last week cut their bullish position to the equivalent of 639 tonnes net long, de Wet says, “the lowest level since March this year.

“As a percentage of [all] open interest, the non-commercial net long position now stands at 25.5% – the lowest level since Nov 2008. We therefore foresee more gold longs.”

Over on the currency markets on Monday, the Euro held steady against the Dollar around $1.29, but the British Pound jumped once again, challenging 5-month highs above $1.55.

Nomura bank analysts in New York say in a new report that central banks added a record $24.5 billion of “other” currencies to their portfolios between Jan. and April – meaning currencies outside the Dollar, Euro, Sterling or Japanese Yen.

Typically led by the “commodity Dollars” of Canada and Australia, Norway’s “petro” Krone, plus the higher-yielding New Zealand Dollar, these “other” currencies accounted for 3.7% of central-bank reserves worldwide by April, Nomura thinks, up from 1.5% a decade ago.

Gold bullion has gone from 12.2% of central-bank reserves by value in early 2000 to 10.0% in Q1 2010, according to World Gold Council research.

“Current news is not indicating an inflation threat and the sovereign debt-crisis is gradually vanishing from public attention,” says Wolfgang Wrzesniok-Rossbach in his latest Precious Metals Weekly for German refinery Heraeus.

Last week’s upbeat European banking “stress test” results – much-challenged by private-sector analysts – said only 7 out of 91 institutions now need to raise extra capital.

“If the Indian gold merchants also sit back in August, Western investors will again have to get active,” says the Heraeus report. “[But] demand for investment gold bars in mid-Europe in the last ten days has been again at a low level, and the relatively low prices in Euro terms have not had much effect on this.

“Here in Europe, scrap-gold supplies [have] continued to flow at unchanged (robust) levels.”

Today the gold price in Euros bounced higher after re-touching Friday’s 3-session low of €29,500 per kilo, while the price of gold for UK investors fell to its lowest level since late April below £766 an ounce.

Luxembourg’s Commerzbank notes that, on the World Gold Council’s data – compiled by London consultancy GFMS Ltd – the supply of “scrap” gold from unwanted jewelry worldwide fell 43% in the first quarter of this year from the start of 2009, down to 343 tonnes.

Adrian Ash

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 – 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.

Credit Deflation Lands in Britain

By: Adrian Ash, BullionVault

Credit deflation just hit the UK for the first time on post-war records…

HMMMM…This looks telling.

UK banks will soon be able to post raw loans – rather than securitized loans that have been bundled into asset-backed bonds – as collateral against short-term liquidity aid from the Bank of England.

This will mean lending central-bank cash against the commercial banks’ major assets, as the Old Lady of Threadneedle Street puts it, rather than against that sliver of their balance-sheets held as securitized loans. Which seems prescient, for two reasons.

First, securitization of UK consumer, mortgage and business debt has all but collapsed. Net-net, there haven’t been any sizeable securitizations of UK bank lending for six months running – the longest period since 1998.

The two months before that actually saw securitizations paid back, and at the fastest pace on record, down by £26 billion. Which is a pity for the UK’s formerly go-go-crazy-bones credit bonanza.

In the 10 years ending Dec. 2009, securitization added £325 billion to the growth in UK bank lending, expanding new credit by more than 20%. And why not? Securitizing bank loans, by parceling them up and then selling the debt to investors both foreign and domestic, gave banks the chance to lend the same Pound twice, skimming a profit both times. It also gave insurance and pension funds the chance to invest in Britain’s record debt bubble…a boom which ended with more people working more hours to service more debt than ever before in history.

That bout of collective insanity has now got the DTs. Because second, and as a result of securitization’s collapse (or so we guess here at BullionVault), private-sector UK loan growth overall last quarter did what it’s never done before (not since records began in June 1963, at least) and actually turned negative.

The Bank of England’s decision thus looks timely, if ineffective against the credit deflation already underway.

To repeat: UK bank lending to the private sector has never previously shrunk, not in the 47 years of available data. And lending cash to commercial banks Walter Bagehot-style – albeit by accepting their debtors in turn as collateral, and not charging that “high rate” the 19th-century economist recommended either – is what central bankers are for, after all.

Concluding her 3-month consultation with the banking sector, the Old Lady said Monday that she’ll start accepting “raw loans” as collateral for short-term liquidity, dispensed via the Discount Window Facility, in 2011. That expands the list of eligible collateral which banks can post from securitized debt (those asset-backed bonds accepted since Dec. 2007 on top of government gilts), just so long as the loans are residential or commercial real-estate mortgages, consumer loans (but not including credit cards), or corporate loans to non-bank borrowers.

Unlike the Bank’s failed attempt to inject cash into the UK economy via Quantitative Easing, this latest wheeze to underwrite the credit-supply will at least keep the Old Lady’s cash onshore. Because the raw loan’s end-borrower “must be UK-based.” Which should stop the tabloids screaming about “foreigners stealing” this particular chunk of Britain’s monetary easing when it begins.

Whether it stems the UK’s credit deflation remains to be seen. And whether that deflation ever gets to stem the ongoing inflation in prices still awaits history’s verdict, too. Because while private net lending shrank between April and July, quarterly consumer-price inflation meantime rose to 1.3%, knocking 3.3 pence off the purchasing power of each Pound Sterling compared with 12 months prior.

Deflation in credit but inflation in prices? With the fastest GDP growth in four years coming in at 1.1% at market (i.e. unadjusted) prices across the quarter? Economists from Mervyn “monetarist” King to Paul “Keynes re-born” Krugman say this confluence of pain can never happen. So best wheel out the Bank of England’s printing press yet again, just to get reality back on track with theory.

Adrian Ash

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 – 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.