Gold’s Rise To Continue Above $2,500/oz On Negative Real Interest Rates

Today’s AM fix was USD 1,689.50, EUR 1,349.23, and GBP 1,065.26 per ounce.
Yesterday’s AM fix was USD 1,691.50, EUR 1,342.25 and GBP 1,067.44 per ounce.

Silver is trading at $32.18/oz, €25.73/oz and £20.32/oz. Platinum is trading at $1,563.50/oz, palladium at $636.50/oz and rhodium at $1,025/oz.


Cross Currency Table – (Bloomberg)

Gold edged up $3.50 or 0.21% in New York yesterday and closed at $1,695.30. Silver rose to $32.27 in Asia, slipped to $31.90 in London, and then hit a high of $32.40 in New York and finished with a gain of 1.84%.

Gold edged down overnight, but is not far from the 6 month high hit last session as weak economic data from the US bolstered hopes of further stimulus measures by central banks.

US manufacturing contracted at its fastest pace in more than three years in August and US construction spending dropped in July by the greatest amount in a year, the disappointing ISM index and construction spending data were released yesterday.

These reports ignite further hope for investors that Ben Bernanke will launch QE.  Gold rose 4.5% in August and is now targeting the $1,700 price level again, the most since January, on speculation that the Federal Reserve will add to its $2.3 trillion bond-buying program. 

Investors are awaiting the key US employment data due on Friday for further signals on the poor health of the US economy.

Bill Gross, the co-chief investment officer and founder of Pacific Investment Management Co., manager of the world’s biggest bond fund, said in a Twitter post yesterday that signs that the European Central Bank will also increase steps to boost economic growth are “very reflationary” and mean that investors should “buy gold, TIPS and real assets.”

Peaks in gold prices since 1975 have usually been associated with rising real interest rates. 

Times when real interest rates fell in tandem with gold prices include 1987-1990 and 1996-2001. 

Even though real rates are have risen slightly, they remain below their historical average and levels below 2% have still been supportive of rising gold prices.

The 2% real interest rate threshold has served as an inflection point for gold prices. 

Gold prices languished from 1980 to 2000, when real rates stayed higher than 2%. While real rates were volatile during this time, gold prices continued to decline even as real rates were relatively unchanged.

Gold prices languished from 1980 to 2000 and had declining correlations with debt levels because GDP growth was sufficient to mute fears about budget and deficit issues. The current economic recovery has been too weak to support a sustained rise in real rates above the 2% level that has acted an inflection point for gold prices.

With energy and food inflation deepening and soon to affect consumer price indices, interest rates may have to rise significantly in order to restore real interest rates above 2%. 

This is with ex Federal Reserve Chairman Volcker did in the late 1970’s – when he increased interest rates to above 15% in order to protect the dollar and aggressively tackle inflation.

It is unlikely that similar ‘hawkish’ monetary policy would be implemented by the Bernanke Fed today. It is unlikely that they would and even doubtful if they could – given the appalling fiscal situation and levels of debt in the US and global economy. 

A continuing succession of higher real gold prices above the inflation adjusted high, or real record high, of $2,500/oz is likely until we see interest return to more normal levels and zero percent interest policies are supplanted by positive real interest rates.

NEWSWIRE
(Bloomberg) — Gold Seen by TD Securities Rising to $1,900 An Ounce in 2013
Gold may rise to $1,900 an ounce in the second half of 2013 from $1,775 in the fourth quarter, according to a presentation today by TD Securities Inc.

Silver may rise to $33 to $34 an ounce in the fourth quarter and $37 in the second quarter, the company said. Palladium will be in shortage this year and next year and platinum may move into shortage in 2013 and 2014, it said.

(Bloomberg) — Gold’s Surplus:  “Investment demand has filled the gap”
Gold’s surplus will continue to grow this year to at least 2,100 metric tons this and may be valued at as much as $120 billion, Thomson Reuters GFMS said.

“This is not necessarily a condition for lower prices,” Philip Klapwijk, global head of metals analytics at GFMS, said today in a presentation in London. “Investment demand has filled the gap.”

(Bloomberg) — China Seen by GFMS Overtaking India in 2012 as Top Gold Market 
China will likely overtake India as the world’s biggest gold market this year, Philip Klapwijk, global head of metals analytics at Thomson Reuters GFMS.

The expectation of higher prices may spur Chinese investors to buy more gold, he said today in a presentation in London.

For breaking news and commentary on financial markets and gold, follow us on
Twitter.

NEWS
Gold futures seesaw with $1,700 in sight – Market Watch

Gold Tops $1,700 on Bets Central Banks to Boost Stimulus – Bloomberg

Gold ends at 5-month high on central-bank hopes – MarketWatch

Gold rises for 3rd day; resistance at $1,700 per ounce – Reuters

COMMENTARY
Jim Rogers: How to ‘Protect Yourself’ From ‘Debased’ Currencies – CNBC

Did The Great Financial Crisis Start With The End Of The Gold Standard? – Zero Hedge

Chart Of The Day: 803 Years Of Global Inflation – Zero Hedge

Turkish Gold Exports (And Imports) – Forexpros


Mark OByrne

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