Gold Reaches 4-Session High on Record Oil, Food-Price Inflation & “Public Liquidity”

THE SPOT PRICE OF GOLD rose to a four-session high in Asian and London trade on Tuesday, gaining almost 1% overnight as world stock markets crept higher and US bond prices rose.

Crude oil jumped to a fresh record high above $112.80 per barrel.

THE SPOT PRICE OF GOLD rose to a four-session high in Asian and London trade on Tuesday, gaining almost 1% overnight as world stock markets crept higher and US bond prices rose.

Crude oil jumped to a fresh record high above $112.80 per barrel.

"Market participants are still very much on the long side," said one Singapore Gold Dealer to Reuters earlier. "We need to see fresh buying from [investment] funds to bid gold up to above $940."

The latest Commitment of Traders report from the US gold futures market shows the "large absence of any fresh buying" agree analysts at Mitsui, the precious metals dealer.

But "we haven’t ruled out a $1,000 print in April," they go on. "Indeed, the 20% decline in the global [futures, options and trust-fund] position over the last four weeks indicates ample room for investors to re-enter the market before we can begin to all it frothy again."

The biggest bullion banks in London today set the AM Gold Fix at $931.75 per ounce, up more than 2.7% from last Wednesday’s low.

For French, German and Italian investors wanting to Buy Gold today, the AM Fix was set above €588 per ounce, its best Morning Fix so far this month.

"The forces that have propelled Gold for the past five years are intact, if not intensifying," said Citigroup analyst John Hill in a note Monday.

"Central-bank policy prescriptions for the credit crisis are uniformly re-flationary."

Inflation for US manufacturing businesses will be reported later today, and "a higher-than-expected PPI statistic would decrease the probability of further aggressive Fed easing on April 30th," according to Manqoba Madinane and Walter de Wet at Standard Bank in Johannesburg.

"That may put downward pressure on precious metals…but we still see near-term upside potential for the [Gold Market] in tightening liquidity conditions, as indicated by rising interbank lending rates that signal ongoing financial markets stress."

(Why do Interest Rates & Risk Matter to Gold? Read on here…)

Fed governor Kevin Warsh – at 38, the youngest member of the Open Market Committee and previously an M&A specialist at Morgan Stanley and then economic advisor to the US president – spoke yesterday of "a striking decline in confidence in the financial architecture itself.

"Perhaps an analogue to banking systems without deposit insurance is appropriate," he told the Global Economic Policy Forum at NYU’s School of Law. "Depositors withdraw funds if they believe others will act similarly.

Charting the boom in securitized debt investment, "the script was rewritten [in early 2008] so that product innovation flowed, but this time from the public authorities. [But] in my view, public liquidity is an imperfect substitute for private liquidity."

The Bank of England today injected £15 billion ($29.5bn) into the London money markets after the British prime minister, Gordon Brown, held an emergency breakfast meeting with commercial bank chiefs.

Three-month interbank lending rates were unchanged from Monday, however, at 5.93% – almost one per cent above the Bank of England’s current overnight target.

The British Pound fell hard on the currency markets meantime – down 1.1% to the Dollar and reaching fresh record lows to the Euro – after official data showed consumer-price inflation holding flat at 2.5% year on year in March thanks to sharp discounting from furniture and kitchen retailers, plus a fall in the price of computer games.

Many economists then brought forward their forecast for the next Bank of England rate cut from June to May after the Royal Institution of Chartered Surveyors reported its worst survey of UK house prices since the RICS index began in 1978.

"Estate agents are still talking up the market to win [new] instructions," complains one surveyor in the affluent "stockbroker" commuter belt of Surrey, "[but] applicants are not taken in by asking prices. This practice will continue unless we see a reduction in the cost of borrowing."

Only 3% of the 285 professional surveyors interviewed saw a rise in their local house prices. Fully two-thirds reported a fall.

The US Dollar meanwhile held flat against the Euro and Japanese Yen, but the broad-based GSCI index of commodity prices rose 0.8% as soft commodities surged higher following US president George Bush’s grant of $200 million in emergency food aid to poorer countries facing social unrest and food riots.

US rice futures today hit a new all-time high in response, standing more than twice above their level of last August – back when the Federal Reserve Began Slashing US Interest Rates.

"Asian rice prices have soared even more sharply since January," reports Bloomberg today, "as big importers rush to build up stocks on fears that supplies will become scarce as exporters clamp down on shipments."

 
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.