International Monetary Policy Favors Gold as Interest Rates Stay Near Zero

GOLD

Gold was unchanged in London before dipping to $1,126/oz in New York, it then recovered to close down 0.92% at $1,131/oz. It has had a $4 trading range in Asian trading this morning. Gold is currently trading at $1,135/oz and in Euro and GBP terms, gold is trading at €835/oz and £755/oz respectively. Gold remains near record nominal highs in euros and sterling and appears to be consolidating near these record price levels.

Gold should remain well supported with interest rates remaining close to zero. The European Central Bank and the Bank of England kept their interest rates at record lows Thursday – keeping them on hold at 1 percent and 0.5 percent. With the Federal Reserve having interest rates near zero as well, the “opportunity cost” to own non yielding gold remains favourable. One does not sacrifice yield in owning gold versus Treasury bills. T-bills, government bonds and cash are paying little or no interest, so it remains prudent to have an allocation to gold as it is a currency that cannot be devalued by governments or central banks.

Monetary policy looks set to favour gold for the foreseeable future and interest rates will have to return to their long term average or higher in order to incentivise savers again. It is very important to remember that gold only peaked in value towards the end of the Federal Reserve’s interest rate tightening in the 1970s. Gold is over the long term correlated with interest rates meaning that gold tends to rise when interest rates rise and fall when interest rates fall. While this was not seen in recent years, it was clearly seen between 1971 and 2000. Gold rose sharply in value in the inflationary and rising interest environment of the 1970s and then in the disinflationary, falling interest rate environment of the 1980s and 1990s, gold fell in value.

Continuing record low interest rates and the significant macroeconomic and currency risk seen today should lead to gold remaining firm in all currencies.

Gold Technicals
There appears to be a trend for higher gold prices forming again as seen in the break out of gold in euros and sterling to new record highs this week. As usual, the breakout above previous resistance at previous record nominal highs after a period of correction and consolidation could signify a rally in the coming months in these currencies but also in the dollar.

Gold's rise of $70 per ounce and nearly 7% in the last month from lows at $1,060/oz (February 8th) to over $1,130/oz could signify the end of the recent correction. Especially as it has coincided with a period of strength for the dollar versus the euro and sterling.

Gold could again rise to its recent record high of the 3rd of December at $1226.44/oz especially if resistance at $1,160/oz is broken. A weekly close above the previous record high would set up to challenge $1,300/oz in the short term and longer term (4 to 5 years) the inflation adjusted high from 1980 of $2,300/oz remains a possible price target. However, gold would have to sustain the gains of the last 4 weeks and stay above support above $1,100/oz for a challenge at the $1,300/oz level to come in the short term.

(Related Article - Bloomberg: Gold May Rise Back to Record, Technical Analysis)

SILVER
Silver has range traded from $17.14/oz to $17.26/oz in Asia. Silver is currently trading at $17.23/oz, €12.67/oz and £11.46/oz.

PGMs
Platinum is trading at $1,580/oz and palladium is currently trading at $468/oz. While rhodium is at $2,575/oz.

NEWS
- Oil prices remained firm in Asian and early European trade Friday on bargain buying contributing to gold’s recent strength. New York's main contract, light sweet crude for delivery in April, gained 47 cents to $80.68 a barrel. London's Brent North Sea crude for April was up 54 cents to $79.08.

- China's Wen Jiabao said in his annual ‘state of the nation’ address that the economic turnaround is not yet a fundamental improvement. He said that China must share the fruits of its economic miracle more evenly between rich and poor as it seeks an orderly exit from last year’s massive £400bn stimulus package. Mr. Wen said that after leading the world out of the global financial crisis, China now faced a “crucial year” in which it must curb inflation and lay the foundations for stronger internal consumer demand. “This is a crucial year for continuing to deal with the global financial crisis," Mr. Wen said "We still face a very complex situation."

- France's unemployment rate jumped to 10%, the highest in a decade, and a figure likely to influence voters ahead of regional elections, latest figures have shown. Unemployment has been climbing for seven quarters, since the economy dipped into recession in 2008, but the leap announced on Thursday was especially high, from 9.5% in the third quarter. This shows that the economic problems in the Eurozone are not confined to the so called PIIGS.

Disclosure: No positions