The gold price fell back under $1,400 per ounce last night following news that Chinese policy makers would release consumer price inflation on December 11, two days earlier than market expectations. The announcement prompted fears that interest rate hikes would be forthcoming as the People’s Bank of China takes further measures to cool its overheated property market.
The U.S. dollar is advancing this morning, putting pressure on the gold price as well as the rest of the commodity complex. Silver, which rose to a new 30-year high yesterday at $30.75 per ounce, came under heavy selling pressure as it broke back below $30. The price of silver traded at $28.95 per ounce heading into the open on Wednesday. Copper climbed to $4.1315 during yesterday’s trading session, its highest level since July 2, 2008 while oil surpassed $90 per barrel for the first time since October 2008. Both oil and copper declined from these levels as the news out of China weighed on the markets.The gold price and entire commodities sector have enjoyed strong gains in 2010 as central banks in the world’s developed economies have implemented ultra-easy monetary policies to combat the deflationary aftershocks of the financial crisis. Investors have consequently poured funds into gold and investments tied to the gold price – seeking protection from rampant currency debasement and a hedge against inflation.
In spite of the potential inflationary risks stemming from the Fed’s money printing activities, however, David Rosenberg contended in his latest “Lunch With Dave” newsletter that deflation remains the primary risk for the U.S. economy. Rosenberg, Chief Economist & Strategist at Gluskin Sheff, cited a recently-published report by the Federal Reserve Bank of San Francisco entitled “The Breadth of Disinflation,” to support his case. In its report, the Fed determined that prices are currently deflating for 72% of the goods and services that people consume – far greater than the 34% figure at the start of the recession in December 2007.
Rosenberg, also a long-time bull on the gold price, went on to characterize Fed Chairman Bernanke’s efforts as “doing everything within his powers from a 0% funds rate to radical expansion of the central balance sheet to reignite inflation… and all he can do is throw matches on a wet towel.”
While corrections, such as the one currently underway, often shake out late-comers, the primary bull market in gold shows few signs of coming to an end. Negative real interest rates and continued efforts by the developed world’s central bankers to extinguish deflation are potent tailwinds for higher gold prices in coming quarters and years.
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