Sterling Falls As BOE’s Posen Says BIS Talking “Nonsense” And Stagflation “Unlikely” In UK

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From GoldCore

Gold is trading at $1,501.60/oz, €1,052.35/oz and £941.09/oz. 

Gold is marginally higher in all currencies and 0.7% higher in
sterling after a downward revision of UK GDP from 1.8% to 1.6% growth
saw sterling decline. Stagflation appears to be taking hold in the UK
with soaring food and energy costs eroding household incomes and
economic growth continuing to decline.

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 ( ????????? ), 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. 

 

SILVER 
Silver is trading at $33.96oz,€23.80/oz and £21.28/oz. 

PLATINUM GROUP METALS 
Platinum is trading at $1,692.70/oz, palladium at $735/oz and rhodium at $1,925/oz. 

 

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