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Dan Denning: Fed is inflating everything except wages, which ensures deflation
Gold prices seen shining in coming months
Analysts say a drop in U.S. dollar
would push bullion up even if inflation doesn't
Globe & Mail, Toronto
Wednesday, May 19, 2004
Inflation or no inflation, gold prices are headed higher
over the next few months, analysts say.
If it's not an increase in inflation that pushes gold
prices up, it will be the a drop in the U.S. dollar that
pushes bullion higher, analysts believe.
Fear does not seem to be playing a big role.
On Monday, bullion rose a negligible US$2.50 an
ounce even as India went through a stock market
meltdown, plunging 11.1 percent, and Iraq and
Turkey were hit, respectively, by assassinations
and terrorist bombs.
Gold markets during the past few weeks have even
shrugged off record-high oil prices.
The price of gold has dropped to $375.80 an ounce
from $428 on April 1 at the same time as bond traders
have seen U.S. Treasuries plunge in price and yields
soar on fears of higher inflation and rising interest
As economist Martin Murenbeeld of Victoria-based M.
Murenbeeld & Associates Inc. put it: "Since when did
higher U.S. inflation data and higher bond yields go
hand in hand with lower gold prices?"
"We are not convinced the U.S. economy is so hot
that we're going to have a lot of inflation," Mr.
Murenbeeld said. "I don't see the world economy as
anywhere near full employment."
There is excess labour and underutilized capital
around the world to keep prices down, he said.
However, what is going to cause gold to rise in price
is a renewed drop in the U.S. dollar as investors shun
the currency and bonds because of the country's
budget and trade deficits, Mr. Murenbeeld said.
He attributed the recent weakness in the price of gold
to the bounce in the U.S. dollar.
John Ing, the president of Maison Placements Canada
Inc., thinks gold is about to rise because of the
likelihood of rising inflation. "It's only during the last 30
days that inflation is raising its head," Mr. Ing said.
"There's no question that we're going into a different era
with higher rates of inflation."
The underlying inflation is being masked by the methods
used in the calculations, Mr. Ing said. Everyday
expenses such as rent and fuel are rising along with the
price of food, such as beef and milk, but those numbers
are not showing up in the U.S. inflation statistics, he said.
A more realistic measurement of inflation shows up in the
Commodity Research Bureau data, he said.
"There hasn't really been a decoupling of gold and inflation,"
Mr. Ing said. "The inflation numbers and the method of
calculation are out of whack."
"Inflation is not the only driver of gold," said Paul Walker,
the chief executive officer of London-based GFMS Ltd.,
a precious metals consulting company. "The inflationary
pressures are not immediately obvious."
But there is a significant amount of downside risk to the
U.S. dollar as a result of the budget and trade deficits,
which will result in major financing risks, Mr. Walker
said. "There has to be a serious adjustment to the U.S.
economy either pre- or post-election," he said.
The price of gold should increase as a result of a
substantially weaker U.S. dollar, especially if China
signals that it will no longer be a major buyer of U.S.
Treasuries, which has helped the U.S. government
finance its budget deficit.
China is currently trying to slow its economy, which
could be accomplished by allowing its currency to rise
against the U.S. dollar by no longer buying U.S.
dollars and using them to purchase Treasury bonds,
some analysts say.
China and Japan have both been major purchasers of
Yesterday, gold fell $3.70 an ounce to $375.80 as the
U.S. dollar rose against the euro.
The decrease in the euro was a result of a fifth
consecutive monthly decline in investor sentiment in
Germany, which suggests that European growth will
lag expansions in the United States and Japan,
according to Bloomberg News. An 8.25-percent
recovery of the stock market in India yesterday also
contributed to the decline in gold.
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