Gold Drops 1.5% as US Inflation Falls for Everyone Not Eating, Traveling or Trying to Keep Warm at Home

SPOT GOLD PRICES dropped to a three-session low as the New York opening drew near on Friday after the Commerce Dept. said a key measure of US price inflation dipped last month.

The "Core PCE" inflation – which strips out both food and fuel prices, and which is closely watched by the Federal Reserve – rose by 2.0% in the year-to-February, just shy of Wall Street forecasts.

SPOT GOLD PRICES dropped to a three-session low as the New York opening drew near on Friday after the Commerce Dept. said a key measure of US price inflation dipped last month.

The "Core PCE" inflation – which strips out both food and fuel prices, and which is closely watched by the Federal Reserve – rose by 2.0% in the year-to-February, just shy of Wall Street forecasts.

Including the cost of eating, heating and transport, the rate of inflation dipped to 3.4% but held close to late 2007’s near 17-year highs.

 
It also remained way ahead of current US Treasury bond yields and Federal Reserve interest rates – now expected to fall again when the Fed meets in April to 1.75%.

Ahead of Gold’s 1.5% drop this morning, "there [was] book squaring at the end of fiscal year" on Monday, one Hong Kong gold dealer told Reuters overnight.

"The market has gone up by more than $40 in the last few days, so it’s taking a break. Weaker oil is also a factor."

Crude oil for April delivery slipped back below $107 per barrel after gaining 1.6% on Thursday’s news of bomb attacks on the key Iraqi oil port of Basra.

Southern Iraq’s oil exports have fallen to 1.20 million barrels per day, reports Dow Jones Newswires, down from the previous average of 1.56 million barrels a day.

"Higher oil prices tend to lift global inflation expectations," note Manqoba Madinane and Walter de Wet in today’s Gold Market note from Standard Bank in Johannesburg.

"We expect further upside in the near term for gold," they go on, "although a short-term correction is likely ahead of the weekend."

Standard Bank today put support for Gold Prices at $938, with potential resistance at $951 per ounce.

Today’s AM Gold Fix here in London was set at a three-day low against both US Dollars and the Euro ($944.50 and €598.28 respectively), but the Gold Price in British Pounds rose 0.5% from Thursday to £473.05 per ounce.

Sterling dropped sharply on the forex market Friday morning – losing 1.5¢ to the Dollar and falling to a fresh 12-year low vs. the Euro – after the UK’s second-biggest mortgage lender, Nationwide, said house-price inflation has now slumped to its lowest rate since 1996.

But "the Euro, which is also based on low growth rates, is too strong," claimed French president Nicholas Sarkozy in a speech concluding his state visit to the UK last night.

Given the strength of China’s economy, M.Sarkozy believes the Chinese Yuan is massively undervalued, and "the Dollar has never been weaker."

The Euro recovered yesterday’s high above $1.5820 early this morning, while the US currency also struggled vs. the Japanese Yen below ¥100 per Dollar.

This week the European Commission said the Eurozone economy is starting to "feel the pinch" of the international banking crisis.

The EC then cut its estimate for GDP growth in the 15-member currency zone to 1.8% for 2008 – the slowest rate of growth since 2005.

Over in Tokyo, gold futures for delivery in Feb. 2009 held steady to equal $948.90 per ounce, while Japanese government bond prices rose in price – pushing the five-year yield down to 0.74% – on news that unemployment in the world’s second largest economy rose in February.

The Nikkei stock index pushed higher regardless, closing the week 2.7% higher as Asian stocks ex-Japan also gained.

Only Australia’s ASX bucked the trend, losing 0.3% for the day – and closing almost 16% lower for 2008 so far – after a "prime broker" serving hedge funds and other large speculators with securities lending and finance was forced into receivership.

The second Australian broker to hit trouble so far this year, Opes Prime Group also ran an asset management operation in Singapore. Now the receivers, Deloitte, have reported "a number of cash and stock movement irregularities in relation to a small number of accounts."

The administrators, Ferrier Hodgson, said today "the solvency of the business was under pressure due to a number of major clients not meeting significant margin calls."

Broad commodity indices fell as silver slipped but base metals rose. Soft commodity prices ticked lower, but soybeans were still heading for their biggest weekly gain in two years as farmers in Argentina continued to block roads and ports in protest against a rise in export tariffs.

The Chinese government yesterday raised the official sale prices of wheat and rice by 10% after consumer-price inflation for February was reported at a new 11-year high of 8.7% year-on-year.

Prices for pork have almost doubled since March 2007, reports Bloomberg, while soybean oil has risen by 64%.

"Food prices all over the world are going through the roof and so spread the risk of social unrest," says Jim Rogers, manager of the eponymous commodities fund and co-founder with George Soros of the Quantum Fund, which rose by 4,200% during the inflationary 1970s.

"It doesn’t matter where, everybody has to pay higher prices for food and that’s causing a problem."

 
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 – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
 
(c) BullionVault 2008

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 ? where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.