Gold and silver have extended their recovery and may be headed for the fourth day of gains due to the continuing European sovereign debt crisis, Chinese inflation (+5.3%) and the real risk that rising oil and commodity prices are leading to an international inflation spiral and stagflation.
Cross Currency Rates
German inflation data this morning was worse than expected, jumping to 2.7% from 2.3% due to surging energy costs, and in spite of the recent strength in the euro. This has led to the euro falling against all currencies and especially against gold.
In the US, gasoline prices are continuing to rise with US petrol prices looking set to hit $4.00 a gallon. The man in the street is feeling inflation in his pocket contrary to reassurances by Ben Bernanke and the Federal Reserve.
Generic Gasoline Future - 5 Year (Weekly)
The precious metals are likely to be supported later today when US trade deficit data is expected to be poor with still high oil prices leading to a very large expected deficit of $47.7 billion. This should see the dollar come under pressure and support gold.
The Bank of England inflation report today is expected to point to higher inflation but still no interest rate rise due to declining economic growth.
UK CPI EU Harmonized YoY - 1989 to Today
Stagflation or low economic growth, high unemployment and rising inflation is a clear and present danger to the UK, EU and US economies and other economies internationally.
This is especially the case in the UK where house prices have begun to fall again and may be set for sharp falls. Internationally, we are seeing significant debt deflation where the value of goods and assets bought with debt are falling (cars, property etc) while the value of finite, essential goods such as food and energy are rising.
Safe haven and inflation hedging diversification into gold is likely to continue as inflation is deepening and there is a distinct whiff of stagflation in the air.
Ultra loose monetary policies and leaving interest rates close to zero percent will lead to further inflation and currency debasement. In order to curb stagflation there will need to be a return to monetary and fiscal discipline and positive real interest rates as was done by Paul Volker in the 1970s.
It is too early to tell whether the recent sell off is over and a further correction is possible however global macroeconomic conditions suggest that gold and silver bull markets are very much intact.
This is especially the case due to continuing Asian demand with gold again being bought on all dips in China, India and the rest of Asia.
Bloomberg reports that Indian demand remains robust according to UBS sales figures. Reuters report that the selloff in gold and silver has seen physical buying of both gold and silver in Asia where dealers report that there was physical buying below $1,500/oz from India, Indonesia and China.
A Hong Kong dealer said that there was not much scrap selling, as people are still bullish on gold (see news).