Gold Higher as Risk of Competitive Currency Devaluation and Debasement Underestimated

Gold

Gold fell initially after the QE2 announcement yesterday prior to recovering and it then rose steadily in after hours Asian and again in early European trading. Gold has risen to $1,362/oz due to the dollar falling and oil and commodities rising significantly in the aftermath of the announcement of the new $600 billion of quantitative easing.

Gold is currently trading at $1,362.30/oz, €957.21/oz, £843.20/oz.

Gold is now only 2% below its recent nominal record high on October 14th ($1,387.35/oz) and after a period of consolidation the trend would suggest that $1,400/oz remains a near term target. Silver traded erratically yesterday with unusual price swings prior to reasserting its upward momentum and rising to new 30 year highs at $25.40/oz this morning.

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Equities internationally have surged but it is hard to know if this is due to a belief that the US and global economic recovery might continue or is it due to some market participants using equities as an inflation hedge. Long dated US treasury bonds fell sharply yesterday and concerns about significant overvaluation in bond markets, particularly as commodity prices are back near the higher levels seen in mid 2008, are valid.

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The assumption that commodities are in a bubble is wrong as many commodities are well below their recent highs in mid 2008 when the Thomson Reuters/Jefferies CRB Index was trading as high as 473 (see chart). Today the benchmark commodities index is trading 55% lower at just 305and is close to its average price in 2005, 2006 and 2007. More importantly, most commodities remain well below their inflation adjusted highs of more than 30 years ago. With currency debasement and currency wars in the form of quantitative easing and competitive currency devaluations set to continue, oil, commodities and other tangible, finite markets may continue to rise in price. This will likely leadto inflation – particularly in the food and energy sector.

Complacency about the these inflation risks and risks posed to the dollar and other fiat currencies remains widespread with incorrect assumptions made. Those warning of the risk of inflation are many of the same people who correctly warned about property bubbles and were ignored leading to some the problems that we are experiencing today.

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News

(PRNewswire) – JP Morgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE: HBC) face charges of manipulating the market for silver futures and options in violation of federal commodities and racketeering laws, according to a new lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York.

(Bloomberg) – Demand for 1-ounce Krugerrand gold coins increased by 54 percent in the past month, the South African Gold Coin Exchange said in an e-mail received today, without giving further figures.

(Reuters) Turkish gold imports rise to 9.07 tonnes in October. Turkey’s gold imports rose to 9.07 tonnes in October, compared with 2.45 tonnes the previous month, the Istanbul Gold Exchange said on Tuesday. Turkey is the world’s third-biggest gold consumer.

Mark OByrne

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