Gold Prices Gain as Bank of England Ignores Inflation, Surging Commodities & Cuts UK Interest Rate

SPOT GOLD PRICES rose to an eight-session high for US investors above $939 per ounce as the Wall Street open drew near on Thursday as world stock markets fell and broad commodity prices rose 2.3%.

SPOT GOLD PRICES rose to an eight-session high for US investors above $939 per ounce as the Wall Street open drew near on Thursday as world stock markets fell and broad commodity prices rose 2.3%.

In Frankfurt, Germany, the European Central Bank voted to keep its target interest rate on hold at 4.0%, helping cap the Gold Price in Euros at a two-day high of €590 per ounce.

But for British investors and savers wanting to Buy Gold today, the price moved to a two-week high – some 2.8% above Wednesday’s opening level – after the Bank of England cut its key interest rate to 5.0%.

That decision took the net returns paid to cash after inflation and basic-rate tax – even at the new, lower 20% level – back below zero.

"Gold’s role as an ultimate monetary asset is growing in confidence amongst the investors and that is widely seen from accelerated investment demand," said Vision Commodities in Dubai to Reuters earlier today.

"The Gold Market is still in favor of bulls, and occasional slides to key supports shouldn’t question the long term trend."

Crude oil remained above $111 per barrel, just below Wednesday’s fresh all-time record sparked by a sharp deterioration in US energy stockpiles.

Government bond prices also rose worldwide, however, pushing the yield offered by 3-month US Treasury bills to 1.30% as equities dropped 1.3% in Tokyo and 1.6% in Europe.

Consumer price inflation in the United States was last pegged at 4.0% year-on-year in February.

In contrast to US and UK central bank lending decisions, open-market interest rates show "a widening of credit spreads…indicating further structural risks to the global financial system," note Walter de Wet and Manqoba Madinane for Standard Bank in Johannesburg today.

Lehman Bros. was forced on Wednesday to close three failed investment funds and take their losses back onto its balance-sheet.

Overnight, "money markets in Europe and the US also reflected a tightening in liquidity conditions," the Standard Bank analysts go on. "The spread between central bank overnight lending rate and [open-market interbank rates] climbed to 77.5 basis points – close to the 80 bps spread following Bear Stearns.

"These structural risks should lift safe-haven investment demand into the metals complex in the near term."

US stock market futures pointed 0.5% lower as Thursday’s opening drew near, adding to yesterday’s 1.8% loss after Lehman’s announcement.

Goldman Sachs said its exposure to so-called "Level 3 assets" – illiquid investments lacking keen buyers at any price – rose by nearly 40% between Nov. and March.

Morgan Stanley’s pot of hard-to-sell assets grew by 6.1% over that period thanks to the worst "market disruptions" its CEO, John Mack, has seen during his 40 years on Wall Street.

"If you look at this [financial crisis] situation, because we’ve got low inflation [in the UK] we can cut interest rates," claimed British prime minister Gordon Brown ahead of today’s decision from the Bank of England.

Widely criticized for interfering with the Bank’s apparent independence, Mr.Brown no doubt missed the persistence of Retail Price Inflation above 4.0% throughout 2007 and 2008 to date – the worst run of sustained inflation since the last UK recession of 1992.

Thursday morning also brought news that DSG International – owner of the cut-price Currys and PC World electronics chains – has suffered a sharp fall in both earnings and profit margins, sending the group’s shares 6% lower at the London Stock Exchange.

On the currency markets, the BoE’s rate cut sent the Pound tumbling to a new record low against the Euro beneath $1.2460, but it managed a spike versus the even-weaker US Dollar.

The Gold Price in British Pounds was set at today’s AM Gold Fix in London at £471.08 per ounce, its best level since 31st March.

The official statistics agency said today that the UK’s trade deficit was worse-than-forecast in Feb. at £4.4 billion ($8.7bn), thanks to a fall in service industry exports.

Today’s US trade balance numbers for Feb. – due at 08:30 EST – are expected to show a $57.5bn deficit.

 
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.