Gold Remains Firm on Risk Aversion

by Peter A. Grant

February 25, a.m.
(from USAGOLD.com) --

Gold and silver remain well bid amid persistent risk aversion, primarily stemming from ongoing political unrest in North Africa and the Middle East. Oil prices have backed off the recent highs, but remain generally firm, increasing worries about the detrimental impact of rising energy prices on already fragile global economies. Silver has breached resistance at 33.74/75 intraday, leaving little protection for the recently established 31-year high at 34.32. New 16-week lows in the dollar index are helping to keep the metals underpinned as well.

I heard an economist on the radio over the weekend say that when oil prices double, a recession has followed in every instance except one. The one exception to the rule was 1987, when we got a stock market crash instead. From their lows in late-2008, oil prices had already doubled by May of last year. Talk about a double-dip recession has definitely elevated in recent weeks as oil pushed to new 3-year highs. Arguably the recession has been forestalled by extraordinarily loose monetary policy by the Fed, but at what price? When you consider that über-easy monetary policy is also a primary driver behind rising oil prices, the Fed is simultaneously hurdling us closer to the double-dip they are seeking to avoid. On Friday, the Commerce Department revised US Q4 GDP down to 2.8%, from advanced read of 3.2%. The market had been expecting a modest upward revision.

Christina Romer, the recently resigned chairwoman of President Obama’s Council of Economic Advisers, discussed the Fed's "muted" response to the ongoing economic crisis in a NY Times op-ed over the weekend. Clearly she believes that the Fed hasn't done enough to revive the economy because the central bank is facing increased pressure from policy hawks that are primarily concerned about rising inflation risks. Ms. Romer says, "The Fed could engage in much more aggressive quantitative easing, both in size and in scope, to further lower long-term interest rates and value of the dollar." Now it's tough to discern tone from the written word, but that struck me as pretty casual statement about more aggressive QE and a desirous negative impact on the dollar. One can only surmise that Ms. Romer has no concern about how a resumption of the long-term decline in the dollar would impact household budgets here in America, let alone the global implications stemming from the fact that food and energy commodities are priced in dollars. See the recent WSJ op-ed entiled The Federal Reserve Is Causing Turmoil Abroad. [chart] As if on cue, the dollar index fell to new 16-week lows on persistent sovereign supply and month-end related activity. 'Persistent sovereign supply' is an interesting turn of phrase. I would translate that to being sovereigns are dumping an over-abundance of dollars on the market.

Vietnam is just one country that is facing a very high rate of inflation. The rate of inflation surged to 15.7% in February, a 12-year high. Food prices were up 25.2% and late last week, the Vietnamese government announced a 17.5% hike in gasoline prices and a 24% hike in diesel prices. Additionally, electricity prices are slated to rise 15% beginning tomorrow.

And what is the government of Vietnam doing to address these price pressures? Raising rates and various forms of capital controls of course, but they are also now seeking to ban the trading of gold bars on the free market and tightly control gold trading in general. The state-run Vietnam News Agency said "It is bad for the economy because [Vietnam] has to import gold, which causes trade deficits." While gold is the classic hedge against inflation, it would seem that the government is trying to eliminate the populations access to that protection. The State Bank of Vietnam said that these tough measures had been adopted because the accumulation of gold was not benefiting the economy.

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

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