Gold Underpinned by Broad-Based Risk Aversion

by Peter A. Grant

February 16, a.m.
(from USAGOLD.com) --

Gold eked out a new 4-week high in overseas trading on Wednesday, and remains generally well bid within the recent range, as wide-ranging concerns have led to a rise in risk aversion. Silver has adopted a move corrective intraday tone as recent gains stalled ahead of 31.00, leaving the 30-year high at 31.23 protected for the time being.

The contagion of political unrest in North Africa and the Middle East continues to be a major concern. Anti-government protests have now spread to Libya, where the ouster of strongman Moammar Gaddafi is being sought. Gaddafi has been in power since 1969, more than a decade longer than Hosni Mubarak held power in Egypt. The Wall Street Journal reported early in the week that Libyan opposition leaders -- largely via blogs, Facebook and Twitter -- have targeted tomorrow (17-Feb) for the biggest protest yet. Libya has the largest oil reserves in Africa and ranks 12th on the list of the world's biggest exporters. Not surprisingly, oil prices are higher again today.

Protests in Iran are escalating as well and the green movement, which was violently put-down in late-2009, may be trying to re-exert itself. There are also reports circulating that Saudi Arabia is increasingly troubled by the spreading unrest in the region and authorities there have been preemptively rounding-up opposition leaders. If protests do take hold in Saudi Arabia, there would be considerable additional upside risk to oil prices.

With inflation in the United Kingdom now running twice the Bank of England's target, the central bank's Quarterly Inflation Report broadly highlighted ongoing uncertainty, doing little to re-instill confidence in monetary policy. Blaming a continued rise in commodity and import prices, inflation expectations were raised. Meanwhile, the BoE's GDP forecast was lowered. This is highly suggestive of stagflation. With inflation seemingly headed further above target in the near-term, one might have expected a more hawkish tone on policy. However, Mervyn King was quick in attempting to head of speculative selling of Gilts in saying people are "running ahead of themselves by saying we are laying the ground to a rate hike." Like most central banks, including our own Fed, growth risks alway seem to trump price risks...up to the point where people stop spending...at which point price risks are a growth risk.

US PPI for Jan rose 0.8%. While this was in-line with expectations, a bigger than expected rise in core PPI to 0.5% has stoked inflation worries in America. Tomorrow's CPI is expected to be a tepid 0.3%, which would suggest that rising input prices are still not being passed along to consumers. If corporate profit margins are indeed getting squeezed further, there may be cause for concern regarding stocks.

Despite reports early in the week that the EU had reached an accord on its bailout facility, it has become increasingly apparent that is not the case. Both Germany and Austria have now indicated that there is no deal yet. A fresh push to allow bond buying through the EFSF has been met by opposition from Germany and other more fiscally responsible members of the EU. With the pressure growing, primarily in the form of widening bond spreads, yet another meeting has been scheduled for 04-Mar in Finland. Despite recent EU bailouts for both Greece and Ireland, there seems to be a growing consensus that neither has much of a chance of getting their debt to sustainable levels without further aid.

The Industrial and Commercial Bank of China reported it sold 7 tonnes of gold in January alone, nearly half the amount they sold in all of 2010. "We are seeing explosive demand for gold. As Chinese get wealthy, they look to diversify their investments and gold stands out as a good hedge against inflation," ICBC's Zhou Ming told Reuters. As the realities of inflation -- and perhaps stagflation -- sink in around the world, global demand for gold as a hedge is likely to rise even further.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.