Gold Investments Market Update – Sir John Major Says Government Inflation is Massively Underestimated – Real Inflation of Some 10%

Gold

Gold finished trading in New York yesterday at $972.10, up $12.00 and silver was up to $19.15, up 38 cents. Gold rose in trading in Asia before further rises in early European trading. Gold is now up some 7% in the last 5 trading days (from below $920 to over $983) and in normal circumstances one would expect a correction and consolidation. However, these are not normal circumstances.

Gold has rallied again on dollar weakness, oil strength and safe haven demand due to macroeconomic and systemic risk. Macroeconomic in the form of the deepening financial and economic crisis and geopolitical risk in the form of continuing tensions between Israel and Iran.

Oil is up 0.90% and the dollar has fallen again (Euro/U.S. Dollar +0.78%) and is below support at 1.60 to the euro. A close below 1.60 could see the dollar quickly sell off and could see a move to 1.70 in just a few weeks.

Risk aversion is of prime importance and international stock markets have fallen sharply on continuing concerns regarding the health of the U.S. financial system and economy. The Nikkei and the Hang Seng were down by some 2% and 4% respectively as were all other Asian stock markets. In Europe, stock markets are also down with the FTSE, CAC and DAX all down some 2% to 2.5%.

ETFs are seeing very significant inflows as investors hedge themselves against increasing inflation and systemic risk. With no end in sight to the present crisis, this safe haven demand looks set to continue for the foreseeable future and should see us surpass the March highs of $1,030 per ounce in the coming days. Our 2008 forecast of gold surpassing $1,200 per ounce looks set to happen as soon as early Autumn.

Also, despite sharply slowing economic growth in most economies internationally, inflation continues to surge. This was seen in the UK inflation statistics today.

Sir John Major Says Government Inflation is Massively Underestimated – Real Inflation of Some 10%

The UK’s official government inflation rate rose to a record high in June data from the Office for National Statistics showed this morning. The consumer price index rose 0.7% on the month and 3.8% on the year in June, the highest annual rate since records began in January 1997 and second consecutive month that it has been more than one percentage point above the BOE’s 2.0% target.

There are increasing questions about the reliability of government economic statistics including inflation figures.

Sir John Major said yesterday that the true annual rate of inflation is as much as 10 per cent and warned that Britain was on the brink of recession or may already be in recession. The former Conservative prime minister forecast more job losses and bankruptcies and accused the Government of under-stating the real impact of price rises. He said changes to the way inflation is calculated had been “extremely misleading”, with increasing food prices and heating bills not reflected by the official statistics on the cost of living.

With inflation soaring internationally and the UK and U.S. governments underestimating inflation by 2 or 3 times the actual rate, it is clear that inflation is not some ‘flash in the pan’ phenomenon soon to miraculously disappear. Concerted action including higher interest rates by central banks will now be needed in order to tame the mortal threat to all paper currencies that is inflation.

Today’s Data and Influences

Ben Bernanke’s congressional testimony is in the spotlight today, with market participants looking for any clues for the Feds future interest rate policy direction.

Silver

Silver is trading at $19.31/19.36 per ounce (1215 GMT).

PGMs

Platinum is trading at $2010/2020 per ounce (1215 GMT).
Palladium is trading at $452/458 per ounce (1215 GMT).

Mark O'Byrne

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