Gold Investments Market Update – ECB Increases Rates as Trichet Warns of ‘Exploding’ Inflation

Gold

Gold rose to $944.80 in New York yesterday and was up $2.00; silver closed at $18.33, up 13 cents.

Gold has remained firm near 10 week highs on the surging oil price which reached a new record high today <$145.72 – Light Sweet Crude Oil Future – Combined – AUG08>. The dollar is flat today after its decline in value in recent days. Against the euro, the dollar looks set to fall through support at 1.60 in the coming days and 1.70 euro/dollar looks like a very real possibility by the end of September. Longer term, the likelihood of a sharp long recession in the U.S. could well see the euro reach 1.80 or even 2.00 against the dollar (as sterling did to the surprise of many in recent years).

ECB Increases Rates as Trichet Warns of ‘Exploding’ Inflation

As expected, the ECB has increased interest rates by 25 basis points in an effort to tame the real and increasing threat posed by inflation. Trichet has rightly warned of the risk posed by ‘explosive’ inflation. “We central banks have a big responsibility,” … “If we’re not decisive, there’s a risk of inflation exploding. If we act in a decisive way, we can master the situation.”

Less informed commentators and some politicians have been criticising the ECB for their prudent action today when their criticism should be directed at the Federal Reserve for their irresponsibly loose monetary policy in recent years. The Federal Reserve’s continuing ‘cheap money’ and massive bailouts and money printing is leading to a serious decline on the U.S. dollar. There is even the potential of a more serious run on the dollar as warned by some such as Jim Rogers. It is the Federal Reserve’s negative real interest rates (2% base rate and CPI inflation at 4%) and historically low interest rates that is leading to a falling dollar and surging oil, energy, food, base metal and precious metal prices. The notion that the ECB’s increasing interest rates is leading to higher oil prices is shallow and silly and will be seen as such in the fullness of time.

The ECB is being foresighted and looking to the long term stability and health of the fledgling European currency. Correctly, this is their mandate. Inflation is an economic scourge and poses a far greater threat to economies than unemployment. Trichet and others in the ECB realise that western economies must unfortunately suffer short term economic pain so as to avoid the even more damaging prospect of serious stagflation and hyperinflation.

Today’s Data and Influences

A weaker than anticipated ADP employment report showed that 79,000 jobs were lost in the U.S.’ private labour market in June. This does not bode well for the release of official data later today. The non-farm payroll is forecast to fall 60,000 but following yesterday’s news the risks to this forecast are now seen on the downside which could result in further pressure on the dollar and gold strength. U.S. Treasury Secretary Paulson failed to provide any supportive comments, apart from saying that the UK and eurozone were not immune from economic slowdown.

Silver

Silver is trading at $18.15/18.20 per ounce (1330 GMT). .

PGMs

Platinum is trading at $2030/2038 per ounce (1330 GMT).
Palladium is trading at $460/464 per ounce (1330 GMT).

Mark O'Byrne

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