Cross Currency Rates

Despite UK inflation being 4.5% in May, more than twice the Bank of England's target, the BOE’s Posen’s ultra dovish comments are leading to speculation that zero percent interest rates and ultra loose monetary policy will continue for the foreseeable future.  

This poses risks to those on fixed incomes in the UK, savers, the poor and the elderly, and to countries that export to the UK such as Ireland.

Posen said that the Bank of International Settlements (BIS) call for central banks to raise interest rates was “nonsense”. Posen also said there is little risk of a repeat of 1970s-style stagflation.

Gold in GBP – 1 Year (Daily)

His comments are odd given the fact that the UK is already experiencing high inflation and declining economic growth and looks on the verge of a contraction in economic growth and another recession and possibly a depression.

Posen’s lack of appreciation of the real risk of inflation and stagflation both of which the UK is already experiencing leave him open to the accusation that he is talking “nonsense”.

The U.K. government’s fiscal deficit is likely to be a very high 9% of GDP this year and the U.K.’s banking system has a large amount of risk exposure (including sovereign debt exposure), which pose risks for the pound. The Chinese credit rating agency estimates that about 40% of the UK’s banking system’s GBP 2 trillion worth of assets is exposed to risk.

These real risks and the BOE’s ultra loose monetary policy will likely result in sterling continuing to weaken in the coming months.

The parlous state of the euro and the dollar mean that the pound may not fall sharply against these currencies. However, it is likely to fall against gold and new record nominal highs over £1,000/oz seem likely soon.

 
Gold in Nominal British Pounds – 1971 to 2010
 
It is important to remember that the recent record highs in sterling are nominal and when gold reaches £1,000/oz it will only have returned to the inflation adjusted price levels seen back in 1980.

In sterling terms gold rose from below £20/oz to over £300/oz in the 1970’s or 15 times.

Were gold to replicate the performance in sterling again today then gold would have to rise from the ‘Gordon Brown bottom’ (when Gordon Brown commenced selling 60% of the UK gold reserves - increasingly regarded as one of the Treasury's worst financial mistakes which has cost UK taxpayers almost £7 billion) in 1999 at £170/oz to over £2,550/oz in the coming years.

China’s “Silver City” Opens First Precious Metal Exchange – Goal of Trillion Yuan in Trade by 2015
China's first precious metal exchange opened in Yongxing County in central China's Hunan province yesterday.

"Our goal is to reach 1 trillion yuan ($154.6 billion USD) in annual trading volume by the end of 2015," Cao Minghui, the exchange's general manager said at the center's opening ceremony.

"We also hope that the exchange will give Yongxing County a voice in the global precious metal market," Cao said.

Yongxing County ( 中国中部投资博览会 ), is known as the "Silver City" of China for its abundant reserves of silver. Silver output in China’s “Silver city” reached 2,050 metric tons in 2010.

The Hunan South Rare and Precious Metal Exchange, built with a total investment of 260 million yuan (40.2 million U.S. dollars), opened in Yongxing County, whose silver output accounts for one-fourth of the country's total silver output, according to Cao.

The exchange, covering an area of 189 mu (12.6 hectares), includes an exchange hall, several vaults and a quality inspection center.

This is another indication of China’s appreciation of the precious metals and an indication that the surge in demand seen in recent months is likely sustainable.

UBS reports today that Chinese physical interest has been “tweaked by recent price action”.

The Shanghai Gold exchange has seen turnover increase by some 60% this week when compared daily averages so far in June.

“Combined turnover for the AU9999 and AU9995 contracts on the Shanghai Gold exchange has increased to about 8000 kg daily over this week, up from a daily average of around 5000 kg for the month as a whole” UBS said.

Investment demand for silver both as a store of value and as a hedge against inflation continues to surprise the bears. Many buyers in Asia have experienced stagflation and hyperinflation.

The demand is also very strong on the industrial side where the increasing range of industrial applications is leading to very significant demand that the silver market does not appear to be able to accommodate at these prices.

Chinese demand for silver increased a huge four fold to 3,500 tonnes in 2010 – up from 877 tonnes in 2009.

NEWS
(MarketWatch) -- Gold, silver higher as commodities rebound‎
http://www.marketwatch.com/story/gold-silver-higher-as-commodities-rebound-2011-06-28?link=MW_latest_news

(Bloomberg) -- Gold May Gain for First Time in Four Days Before Greek Vote on Budget Cuts
http://www.bloomberg.com/news/2011-06-28/gold-may-advance-for-first-time-in-four-days-ahead-of-greek-austerity-vote.html

(San Francisco Chronicle) -- Gold Pares Drop to 1-Month Low Following Dollar Gains
http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/06/27/bloomberg1376-LNG0FO0UQVI901-752JEM4QTOS5I738GEEGK50PGM.DTL

(Reuters) -- Gold inches up on weaker dollar, Greece bailout hopes
http://www.reuters.com/article/2011/06/28/markets-precious-idUSL3E7HS01H20110628


COMMENTARY
(ZeroHedge) -- Welcome To The Recession: Manufacturing Surveys Imply US Economy Has Entered The Second Month Of A (Re)Recession
http://www.zerohedge.com/article/manufacturing-surveys-imply-us-economy-has-entered-second-month-rerecession

(MoneyWeek) -- God help Ireland
http://www.moneyweek.com/news-and-charts/economics/irelands-financial-problems-54328

(MoneyWeek) -- The next big worry for the eurozone - Italy
http://www.moneyweek.com/news-and-charts/economics/europe/the-next-big-worry-for-the-eurozone-italy-54327

(Mineweb) -- The Greek crisis unraveled and its impact on gold
http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=130267&sn=Detail&pid=102055

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-- Posted Tuesday, 28 June 2011 | Digg This Article