Only Yen and Aussie Dollar Escape New Gold Highs

Includes: DGL, FXA, FXY, GLD, IAU
by: Adrian Ash

Think the current run in gold bullion prices and the big gold ETFs is all about the Dollar?

Of the world's G-10 major economies, only investors wanting to buy gold in Australian Dollars (NYSE:FXA) or Japanese Yen (NYSE:FXY) now find the metal trading below a previous all-time high.

Just yesterday the gold price in British Pounds (NYSE:FXB) set a new record at the London Fix for the third day running – and outpacing the FTSE100 stock index with a 52% gain in the last year vs. a 6.5% loss.

Meantime in India, the world's hungriest market for physical gold bullion, the price of gold in Mumbai started the day 1.6% above Wednesday's new all-time high of Rs 12,000.

How come? OIL above $100 per barrel sure helps, "supporting the rally in gold" as both Mitsui – the precious metals dealer – and John Reade at UBS agree.

But the prime mover in gold remains the real rate of interest, the gap between what the banks will pay to borrow your cash and what the rising cost of living will eat up in the meantime.

The resulting loss of purchasing power is what's continuing to drive investors into gold, and while the monetary inflation facing British gold buyers is bad enough, the United States is – as ever – the true shocker.

Price inflation for US consumers rose to 4.3% in January, confirming the fastest quarterly rise in the cost of living since the summer of 2006. But back then, the Federal Reserve pegged its key interest rate more than 1.0% above the rate of CPI inflation – a half-decade high.

Whereas on last month's data, the real rate of interest for Dollar holders has now slipped to -1.3%, its worst level in 26 months. And the end of 2005, as it happens, marked the start of a 60% jump in gold.

"Policy-makers could pursue a powerfully expansionary policy to all but eliminate the possibility of a significant recession in the year ahead," said William Poole – head of the St.Louis Federal Reserve Bank – in a speech jarring with current Fed policy on Wednesday. "But doing so would come at the cost and even likelihood of an unacceptable increase in the rate of inflation."

Not that the FOMC or interest-rate traders could care. Bloomberg data now shows a 94% chance the Fed will cut another 0.5% off the cost of US Dollars when it meets on March 18th, according to betting on interest-rate futures.

This time last week, interest-rate traders put the odds at 70%. Little wonder gold is going higher.