UK Inflation Rises Again to 5.2% – Ultra Loose Monetary Policy May Lead to Stagflation

Gold is trading at USD 1,656.50, EUR 1,211.20, GBP 1,054.00, JPY 127,093.00, AUD 1,634.70 and CHF 1,494.10 per ounce.

Gold’s London AM fix this morning was USD 1,658.00, GBP 1,054.64 and EUR 1,211.19 per ounce. 

Yesterday’s AM fix was USD 1,689.00, GBP 1,069.33 and EUR 1,217.64 per ounce.


Cross Currency Table

Gold has fallen in all currencies today as equity and commodity markets have seen weakness due to concerns about Chinese economic growth after China’s economy eased somewhat. Germany’s pouring cold water on the likelihood of a speedy resolution of the euro zone’s debt crisis and the summit this weekend has also increased market jitters.

Gold continues to be correlated with equities in the short term but we are confident that this correlation is short term in nature and the inverse correlation between gold and equities and bonds will again be seen in the medium and long term.


Gold in USD – 30 Day (Tick)

Gold priced in euros has fallen less than other currencies as the euro has fallen against most currencies today on concerns about the debt crisis and after another fall in German investor confidence.


XAU-EUR Exchange Rate – 30 Day (Tick)

Peripheral European debt markets are showing weakness again. The recent trend of falling yields appears to have ended which is worrying. Should yields begin to rise again this should create added safe haven demand for gold.

UK inflation rose to match a record high of 5.2% (CPI) and retail price inflation (RPI), a measure of the cost of living used in wage negotiations, accelerated to 5.6% (from 5.2%), the highest since June 1991.

The figures were again worse than expected by the BoE, economists and many economic experts who have been underestimating the threat of inflation for some time.

The BoE, like the Federal Reserve, continues to follow an ultra loose monetary policy in an effort to boost an economy teetering on the brink of a double dip recession.

Second quarter UK Gross Domestic Product (GDP) shocked the markets by showing a disappointing 0.1% growth in the economy, down from a 0.2% increase in the first quarter.

The UK appears to be entering stagflation with declining economic growth and stubbornly high inflation seeming increasingly likely. Whether stagflation becomes as intractable and long lasting as was seen in the 1970s remains to be seen but it would be foolish to completely ignore the risk of stagflation – both in the UK and in most debt saturated western economies.


XAU-GBP Exchange Rate – 30 Day (Tick)

Given the macroeconomic backdrop, the case for owning gold as part of a diversified portfolio remains strong.

Slow global growth and the risk of a global recession, ultra low interest rates and increasing inflation in most markets means that owning gold remains prudent.

For the latest news and commentary on financial markets and gold please follow us on Twitter. 

SILVER 
Silver is trading at $31.04/oz, €22.69/oz and £19.74/oz 

PLATINUM GROUP METALS 
Platinum is trading at $1,525.50/oz, palladium at $601/oz and rhodium at $1,525/oz. 

NEWS
(Reuters)
Gold edges down as risk assets retreat

(Reuters)
Gold slides after German data dents euro

(MarketWatch)
Gold ends lower on data, euro zone woes‎

(The Street)
Gold Prices Held Back by Europe, Strong Dollar‎

(Barron’s)
Gold Wavers, Silver Falls As Dollar Climbs Amid Europe’s Debt Woes‎

COMMENTARY
(WashingtonPost)
Bloomberg Video: Hong Kong Bourse Starts Trading Gold Quoted in Yuan

(King World News)
James Turk – Insolvency of Banks to Cause Gold Explosion

(GoldSeek)
Gold and Economic Decline

(ZeroHedge)
Deutsche Bank Warns France May Be Put On Downgrade Review Before Year End

 

Mark O'Byrne

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