Gold closed at $894.80 in New York and was down 70 cents; silver closed at $17.15 down 22 cents. Both have sold off in Asia overnight and in early European trading this morning.
Gold’s sell off is somewhat counter intuitive given the host of positive fundamentals. However, oil selling off and the dollar strengthening again (despite increasing credit, financial and systemic risk) is contributing to gold’s weakness. Complacency and risk appetite remain very prevalent as seen in the bizarre welcoming of the staggering Lehman Brother’s quarterly loss of $2.8 billion. Supposedly, markets “took heart” from news of Lehman’s plans to raise $5bn of capital which it is hoped would help to stabilise the U.S. financial system. Hope springs eternal.
It is again important to remember that the dollar’s most recent bounce (another dead cat bounce) is only against the euro and sterling and the dollar is again down against the Swiss franc and Canadian dollar today.
Today sees U.S. trade data which is important and a bad number and widening deficit could put the dollar under pressure and be supportive of gold. The U.S. trade deficit probably widened in April as the surging cost of oil boosted imports, economists said ahead of a government report today.
In the eurozone, French and Italian industrial production numbers are the main feature. There are though also several U.S. and ECB officials scheduled to speak which may provide currency markets with some direction.
The FT and the Daily Telegraph both report how investors are betting on higher interest rates in the UK in the coming months.
Investors have bet that the Bank of England will have to raise interest rates at least once and possibly as much as three times before the end of the year.
The Telegraph reports that “Swap rates - the key money market measure reflecting traders’ expectations for borrowing costs - rose at the fastest rate since Black Wednesday 16 years ago after a “shocking” rise in factory gate inflation. In scenes described by one observer as “carnage”, traders embarked on a massive sell-off of UK government bonds, pricing in the likelihood that the Bank’s Monetary Policy Committee will lift the official base rate to 5.75pc by the end of the year.”
The sell-off in sterling interest rate markets was the biggest daily move in more than a decade according to Michael Saunders, economist at Citigroup.
As inflation surges, rising interest rates are likely to be seen in the U.S. and internationally. Otherwise, inflation may get out of control and threaten the modern fiat based, non Gold Standard monetary system.
Contrary to some misguided commentary - rising interest rates are positive for gold as was seen in the 1970s under the prudent monetary stewardship of Paul Volcker, the ex Federal Reserve Chairman. As interest rates went up so did the gold price and it was only at the end of the interest rate tightening cycle with rates nearly at 20% that inflation was contained and investors began to sell gold and return to the safety of very high yielding U.S. government bonds.
Also, it is worth remembering that the U.S. was the world’s largest creditor nation in 1980. Today the U.S. is the world’s largest debtor nation with a national debt of some $9.4 trillion (http://www.treasurydirect.gov/NP/BPDLogin?application=np). Up massively (65% in 8 years) since President Bush took power in 2000 when the national debt was only some $5.7 trillion. Meanwhile, since 2001, long-term unfunded liabilities to Medicare, Social Security Trust Fund and other long term commitments have ballooned from about $20 trillion to an unaffordable more than $50 trillion.
The fiscal problems facing the U.S. today are gargantuan compared to those in the 1970s and this is why gold will at least surpass its adjusted for inflation high in 1980 of $2,200 per ounce in the coming years.
Silver is trading at $17.00/17.10 per ounce (1200 GMT).
Platinum is trading at $2018/2028 per ounce (1200GMT). Palladium is trading at $422/427 per ounce (1200 GMT).
updated Jun 10, 2008
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