Elite World News

Vicenza, 03 10 2007 – While gold was only marginally affected by the financial turbulence of August, on the last Friday of September the US dollar price skyrocketed to a 28-year high.

As Figure 1 shows, with reference to the afternoon fixing at the London Metal Exchange, the US$ 743 figure was the result of a market momentum coming after the period of prolonged calm which followed last year’s high.
It has to be noted that the jump in the price of gold came after the dollar had fallen to a record low against the euro. This time, however, the price of the metal rose appreciably also in other major currencies — euro included — thus showing that the dollar’s deep weakness was not enough to explain the surge in the price of gold . The other factor was not an absolute shortage in physical supply as, according to the World Gold Council, central banks have sold heavily from their official holdings recently thus keeping total supply on the trend. The other factor could have been, not surprisingly, rumours regarding a likely reduction in the future disposal on the part of some central banks, particularly the central bank of Spain, not the low outflow in the year of the gold agreement ending September 2007. As during September the prices of many other commodities, oil included, resumed their ascending trend, it is debatable whether the jump in the price of gold is signalling that investors are looking at the metal as a safe haven against inflation. It is more likely that investors are assigning the safe haven status to many commodities, gold included, and other assets such as tech stocks and emerging markets stocks. All these markets are likely to be tightened by fresh money that has been and is going to be channelled into them.

During September the money and credit markets crisis assumed different features from those prevailing in July and August. If we limit ourselves to the central banks’ reactions, one can immediately notice that while in August the heads of the major institutes held steady on interest rates, in some cases offering extra liquidity to banks at penalty rates, they changed their approach in September. Indeed, there were two notable changes. The Federal Reserve decided to cut the Fed Funds rate from 5.25% to 4,75% on 18 September thus closing the phase of increasing interest rates which started in 2004. On September 12, the Governor of the Bank of England officially refused to provide extra liquidity to the market, but one week later he was forced to offer tens of billions of pounds to troubled banks. The financial turmoil indeed induced a plain run on Northern Rock and possibly on other institutes involved in the mortgage credit market. The decision shows that the weights assigned to the risks of recession and to a financial disruption have increased vis-à-vis those assigned to inflation. It was not surprising that the stock markets jumped and the financial sector at large heaved a sigh of relief.

The President of the ECB is still resisting mounting pressure about the next move on interest rates. A further increase in the repo rate, indeed, would weaken the US dollar even more and put the recovery really at risk in the eurozone, in the first place. Doubts about a further rate increase in the euro zone have been raised of late. Is the euro economy indeed heading towards a recession? The Commission’s industrial confidence indicator declined during summer as did the business climate indexes. A moderate downward revision in GDP growth in the eurozone is now expected for 2007. The recent turbulence in financial markets, tighter financial conditions, credit squeeze and the euro appreciation which took place during the summer have not yet hit fixed investment, private consumption and the trade balance, but their psychological effects are perhaps close to materializing. This could suggest to the ECB Council to wait and see before deciding where to bring the official interest rate. After all, a strong euro relieves the burden of higher commodity prices thus deflating inflation risks.
Source: VIMET S.p.A.