Fears for global economy propel gold price

By Ambrose Evans-Pritchard
The Telegraph, London
Saturday, September 22, 2007

The moment every gold bug has been waiting for finally arrived this week when "Barbaric Relic" smashed through resistance to close the week at a 27-year high of $737 an ounce on the London PM Fix.

A heady mix of a collapsing dollar, a British banking crisis, and widespread suspicion that central banks are slackening in the fight against inflation combined to propel gold above the $730 peak of May 2006.

Analysts say there is now "clear blue sky" until reaching the all-time record of $850 in December 1980, when speculators drove it up in a parabolic rally at the end of the great inflation crisis.

Greg Wilkins, chief executive of the world's top producer Barrick Gold, said the shock half-point rate cut by the US Federal Reserve had been the trigger for a major breakout.

"I think it's a perfect storm," Wilkins said. "What we have is inflation plus lower interest rates, and that's not something that we've seen before. I think that's going to be very bearish for the dollar, which is conversely good for gold."

Adding to the mood of euphoria, the autumn is typically a season for gold rallies, and Spain's central bank has at last halted its bullion sales.

Madrid has been a major cap on prices this year, flooding the market with 150 tonnes. The bank has now cut its total holdings by 46 percent, leaving the country with wafer-thin foreign reserves.

Experts suspect that Asian central banks may have become buyers. China has less than 2 percent of its vast $1,340 billion reserves in gold and has signalled an intent to diversify away from dollars.

President Vladimir Putin has instructed Russia's central bank to raise the gold share of its huge reserves from around 5 percent to 10 percent.

The Fed's aggressive rate cut at a time when oil is hovering at an all-time high of $82 a barrel and food prices are rocketing has created the impression that the US authorities are willing to tolerate higher inflation rather that allow the credit and housing bubble to deflate fully.

As recently at late July the Fed warned that inflation remained the "predominant" risk to the economy. Although price rises were tame in August, there are concerns that the headline CPI rate could jump from the current 2.4 percent to nearer 3.5 percent. China's inflation jumped to 6.5 percent in August and price pressures are developing across Asia, the Middle East, and Eastern Europe.

The Federal Reserve may be right in calculating that the US housing slump is now so serious that it will slow the economy sharply, dampening global price pressures over time. But for now a large number of well-heeled investors are willing to bet otherwise.

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