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Published on Gold Anti-Trust Action Committee (http://gata.org)

''Midas'' commentary for August 28 posted at GoldSeek

By cpowell
Created 2003-08-29 07:00

11:05p ET Thursday, August 28, 2003

Dear Friend of GATA and Gold:

The Reuters story appended here might be useful
reading for the Jim Rogerses, David Willeys, and
other respectables who were last heard tisk-
tisking at the suggestion that central banks in
general and the Federal Reserve and Treasury
Department in particular might have any hostility
to gold.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Surging gold threatens to dim dollar's luster

By Gertrude Chavez
http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=3353162 [1]

NEW YORK, Aug. 28 (Reuters) -- The recent spike in the
price of gold -- a safe haven for risk-averse global
investors -- could jeopardize U.S. stocks and bonds,
undermining a nascent dollar recovery.

Investors' motivation to seek refuge in more tangible
commodities is partly the heightened security worries
ahead of the second anniversary of the Sept. 11 attacks
in the United States and partly the waning prospects
of dollar-denominated asset markets, analysts said.

"Gold is the barometer of geopolitical tensions. If more
people are investing in gold, that's telling you something
is not right about the present geopolitical climate," said
Philip Capone, a foreign exchange trader at Fortis Bank
in New York.

Indeed, there may be some cause for apprehension.
Recent reports in Britain's Sunday Telegraph that
Al-Qaeda is plotting to hijack an aircraft in Britain over
the next two months and Monday's lethal explosions
in Bombay are yet another reminder that the U.S. war
against terrorism is far from over.

After being battered for more than a year, the greenback
has staged a significant rally against most major
currencies over the past few weeks as a plethora of data
reports have signaled the United States will once again
spearhead a global economic recovery.

But with gold on a rampage, analysts say, the dollar
could get hurt, albeit indirectly.

"A gold rally could harm the dollar if it results in a selloff
in other asset markets such as equities and bonds,"
said Capone of Fortis Bank.

Already, U.S. stocks and bonds are looking vulnerable,
analysts say. The stock market has faltered in recent
sessions despite positive economic data because
equities look increasingly fully valued.

The bond market is also in a similar slump, with
improving economic prospects in the United States
appearing to dispel the chances of further interest rate
cuts.

Currency analysts worry that as the price of gold rises,
so too will investors' antipathy toward U.S. assets.
"It could incite further unrest in both the stock and
bond markets, unleashing a wave of selling that could
spoil the chances of a sustainable recovery," said Jes
Black, currency strategist at MG Financial in New York.

From about $254 in April 2001, December gold climbed
to a three-month high of $375.40 an ounce just before
noon on Wednesday in New York. The rally pushed gold
to levels last seen in the aftermath of the U.S.-led war
in Iraq and follows a spate of bombings in the Middle
East, India, and Indonesia.

The active contract is currently trading slightly lower at
around $372 an ounce on Thursday due to profit-taking.

The longer-term backdrop is a steady climb of the
precious metal's price. Gold started to shine again back
in 2001 after a protracted bear market as the dollar's
decline and financial market turmoil gave the yellow metal,
with its steady purchasing power and historic monetary role,
newfound luster.

As the global economy slowed, gold also gained attraction
as one way of insuring against the threat of deflation -- or
an environment of persistently falling prices.

"The low interest rate environment has helped gold,
contrary to some perception," said David Meger, director
of metals trading, at Alaron Trading Corp in Chicago.
"While low interest rates do not allow much for lending
by bullion banks, this has created less selling in the
marketplace," he said.

But after being trapped in a deflationary environment
for many years, Japan -- the world's second biggest
economy -- is now showing signs of recovery along
with the United States, even raising the specter of an
eventual resurgence of inflationary pressures.

Analysts also say the rise in gold is signaling inflationary
expectations, a precursor to a possible fall in the dollar.
High inflation can be closely associated with weakness
in the U.S. currency because it induces monetary
tightening and causes the contraction of dollar supply
in the monetary system.

Black of MG Financial in New York said that with the
shift to gold, markets are already pricing in inflation.
And the more inflation rises, the more investors would
want to hold onto gold as a hedge.

Already, gold traders are talking about the possibility
of the yellow metal climbing higher to over $400, a
level last seen in the mid-1990s.


Source URL:
http://gata.org/node/1952