Gold robust over $1500 as stagflation deepens

With the British pound, the yen, the Swiss franc and dollar showing weakness, gold climbs higher today. The potential for a Eurozone breakup has been leaving gold as a potential safe haven asset when currencies begin to become weak and lose their value.

14 June 2011 at 15:50 IST

Gold is tentatively higher this morning with the British pound, yen, Swiss franc and dollar showing weakness. Greek German 10 year bond yields have surged to euro era record highs and the Greek 10 year bond has surged to a new record high of 17.146%.

The euro has remained remarkably stable, so far, but euro gold at €1,052/oz remains near (3.4%) record highs of €1,088/oz.

Gold is consolidating above $1,500/oz after rising from just over $1,400/oz at the start of the year to a record nominal high of $1,567/oz. The real risk of a Eurozone break up and the likely financial contagion that would result is supporting gold prices and is one fundamental factor likely to lead to further safe haven demand for gold in the Eurozone and internationally.

Credit Suisse has said that gold may rise above $1,550/oz in the next few days and a close above that level “would be important”.

Stagflation Threatens Major Global Economies - Inflation in China at 5.5% and UK at 4.5%
Another fundamental factor supporting gold prices and likely to lead to further gains are the increasing signs of stagflation in major global economies. UK inflation data released this morning shows that inflation remains high at 4.5%.

The Bank of England expects inflation to reach 5% later this year prior to falling but the Bank’s credibility is increasingly strained as inflation has now exceeded the BoE’s target of 2% for 34 of the last 40 months.

British savers and pensioners are suffering from negative real interest rates and this continues to make gold an attractive diversification from a devaluing pound.

Meanwhile in China, inflation has risen to 34 month highs at 5.5% as food price and energy inflation deepens. Lending has fallen and China’s money growth has fallen to a 30 month low. Overnight, China upped its bank reserves to try and contain inflation.

The Chinese have experience of currency devaluation and even hyperinflation and are aware of how paper currencies can be debased and lose purchasing power. Serious inflation in the past has sparked rioting and social unrest and is doing so again today as seen in many riots throughout China (particularly in the South) in recent days.

There appears to be a gathering “perfect storm” of deepening inflation, slowing economic growth and double dip recessions, stagflation, sovereign debt crisis in many major western economies and the risk of sovereign and banking contagion.

This will see gold supported in the coming months and the inflation adjusted high of $2,400/oz remains a viable long term target given these fundamental risks.

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