Gold Re-Joins Euro as Dollar Destroyed; Offers Cheap Insurance Against Fed's Beggar-Thy-Neighbor Inflation

London Gold Market Report

THE WHOLESALE SPOT PRICE of gold continued to rise for US-Dollar investors early Thursday, hitting $951 an ounce in London as the greenback fell versus all asset classes.

Western stock markets also rose together with bonds, non-US currencies and all traded commodities after the Federal Reserve announced $1.25 trillion of "Quantitative Easing" late Wednesday.

Creating $300 billion to buy long-dated US Treasury bonds, Ben Bernanke's policy team also announced a further $750bn to buy government-insured USmortgage bonds.

"USD getting destroyed. Hearing Asian central banks buying Euro," said oneLondon dealer to BullionVault this morning.

"Stops going off on topside," he added, as bearish bets on gold got wiped out by the rising price breaking above traders' stop-loss levels.

Over on the currency markets, meantime – and for the first time since mid-Jan. – the Euro also jumped together with gold, adding to Wednesday's record one-session leap and hitting a fresh 10-week high vs. the Dollar above $1.3680.

Crude oil broke above $51 per barrel. Copper jumped to a four-month high.

The Fed's Nuclear Strike on US Treasury yields – which squished 30-year rates to new record lows – meantime rippled across government bond markets worldwide, with investors bidding up UK and German bonds so high, their 10-year debt yielded barely 3.0% by lunchtime in London.

"I am torn between deflation unleashed by a bursting credit bubble, and the inflationary pressures of the policy response," writes James Montier, strategist with Albert Edwards at SocGen in London.

Trying to identify "cheap investment insurance" for clients this morning, Montier cites inflation-protected government TIPS as one possible solution. His "second inflation/deflation hedge" is gold.

"From an insurance point of view, most obviously...gold is the one currency that can’t be debased. Thus it provides a useful hedge against the return of [the Fed's] sort of beggar-thy-neighbor policy. In the event of significant prolonged deflation [on the other hand], what is left of our financial system is likely to collapse.

"Thus holding a money substitute isn't such a bad idea against this cataclysmic outcome."

Voicing concern at the recent surge in media coverage ("not hugely surprising given that gold is up some 30% since late October"), Montier adds that "Gold is massively under-owned institutionally" even as it "may have been moving up the list of attractive assets.

"The mainstream institutional appetite for gold has remained depressed."

Recording an AM Gold Fix at $937.25 an ounce – its best level since March 2nd – the price of gold only stood sharply higher vs. the US Dollar, however.

Wednesday's London close – one hour ahead of the Fed's $1.25 trillion announcement – saw gold hit five-week lows vs. the Japanese Yen, commodity-rich Canadian and Aussie Dollars, and the British Pound.

Priced against the Euro, gold today traded 3.4% above Wednesday's 7-week low of €671 an ounce, but it failed to hold above the €700 mark – a level first broken on the way up in late January.

Ahead of Wednesday's late surge in Gold Prices, notes Walter de Wet for Standard Bank this morning, "Gold and other precious metals sold off despite equities falling in the US and Europe, and despite a depreciation in the Dollar against the Euro [as well as] US Treasury yields declining.

"All these factors should have been bullish for gold. The only real factor weighing on the Gold Price [was] scrap metal flooding the markets."

Recycled metal – originating from gold-jewelry owners taking profits to raise cash – began pouring onto the international market in mid-2008 as prices rose amid the global economic slowdown.

"[Although] many individuals expected to eventually re-acquire 22-carat pieces as the economy improved," reports Philip Newman, research director at GFMS in the consultancy's latest quarterly update, "Turkey switched from being a significant importer of gold in 2008 to a major net supplier of bullion."

The world's fifth-largest gold jewelry consumer, Turkey imported an average 232 tonnes of gold per year between 2003 and '07.

"Most startling of all," adds Gargi Shah, writing for GFMS from India – the world's No.1 gold jewelry consumer – "for the first time since the Indian gold market was liberalized over 10 years ago, we are starting to observe near-zero levels of net imports."

Back in the Western financial markets, meantime, and looking at Wednesday's $1.25 trillion injection of new money into US asset markets, "A lot of people thought the Fed didn't need to do this," notes John Authers for the Financial Times today.

"[Either] they know something we don't about the banks, or they think a lot more bail-out money will be necessary."

"Should quantitative easing continue," says Emanuel Georgouras at precious-metals dealer Marex Financial, "you can expect to see further gains in gold."