Gold Rallies with Stocks as $1.3 trillion of Washington "Aid" Caps the Dollar; Long-Term Fundamentals for Gold "Remain Intact"

SPOT GOLD BULLION rose further from yesterday's 5-week low early Friday in London, bouncing together with world stock markets after Washington pumped more than $1.3 trillion into the US financial and economic systems.

This fresh flood of money – promised in a series of announcements – put a floor beneath Wall Street stocks, commodity prices and foreign currencies, sparking a rally in all asset classes bar government bonds.

"We've seen some pretty extraordinary monetary and fiscal policies getting proposed by the US and other governments," said Philip Klapwijk, head of GFMS Ltd, at the launch of the respected consultancy's latest Gold Investment analysis in Toronto yesterday.

"This all has the potential in time to spark some serious and maybe sustained inflation. Nor can we ignore the likelihood of Dollar weakness, perhaps even a Dollar bust, as US creditworthiness gets called into question."

GFMS believes Gold Prices could surge to new record highs above $1,000 an ounce between now and July 2009.

Credit Suisse analyst David Davis delays the surge until the last quarter of 2009, warning that "the Gold Price will be volatile" in the meantime.

Further ahead, and following this week's news that South Africa's gold mining output has sunk at the worst rate on record, "We maintain our long-standing view that the supply and demand fundamentals will remain intact for a long-term upswing," Davis writes in a note to clients.

Back in the States, Thursday saw the US Treasury rescue Bank of America for the second time, injecting a fresh $20 billion in return for preferred stock paying an 8% dividend.

The injection is not currently reported anywhere on the bank's "investor relations" website, but it does today report a net loss of $1.8bn for the fourth quarter of 2008, plus a $15bn loss at Merrill Lynch – the failed investment bank bought by Bank of America in Sept.

Yesterday the US Treasury also put a federal "backstop" worth $118bn behind the toxic assets which BoA acquired when it bought the Thundering Herd.

The Democratic House of Representatives then announced $825bn in new stimulus packages, and also released the remaining $350bn of the previous, ineffective Wall Street bail-out program.

New York stocks rallied more than 2.5% on the news, pulling Asian and then European shares 2% higher on Friday.

As today's US opening drew near, Gold stood nearly 3% higher. Both the US Dollar and Japanese Yen continued to retreat on the world's foreign exchange markets, meantime, losing ground to all other major currencies.

The Euro rose 2.2% against the Dollar from yesterday's one-week low, and the British Pound added almost 5% against the Yen after hitting its very worst level ever vs. the Japanese currency in late trade on Thursday.

Here in London today, the government was rumored to be preparing a "bad bank" to buy toxic assets off commercial institutions.

Britain's ailing banks have already swallowed £37 billion ($55bn) of state aid to no net effect.

Looking ahead to Friday's key consumer price data – and looking beyond today's stock-market bounce – "US inflation is expected to turn negative today for the first time since 1955," notes Steven Barrow at Standard Bank in London.

"This 'deflation' might have been caused primarily by the slump in oil prices, but the negative connotations this will have for consumer confidence is bound to imply weak demand and more downward pressure in core prices in the future.

"The Fed, which has already pushed rates down just about as far as they can go, may well do more to try to avoid a deflationary trap. This could hurt the Dollar in the long haul, even if the greenback seems well set right now, given that the slide towards deflation is sparking even more risk aversion in the market."

Investors seeking safety in the securitized trust-fund structure of the SPDR ETF listed in New York yesterday grew their Gold ETF position by 0.6%, pushing the volume of gold held in commercial bank vaults to "back" their shares up to a new record above 795 tonnes.

Here at BullionVault, where private investors own fully allocated physical Gold Bullion outright – free from all balance-sheet and counter-party risk – total allocation has grown by 4% since the start of this month, now reaching more than 13.1 tonnes.

Users continue to choose Zurich as their preferred location for secure storage. The Swiss vault now holds for more than 75% of client gold property, against one-fifth in London and less than 2% in New York.

US clients hold almost 89% of their BullionVault gold in Switzerland.

Adrian Ash
BullionVault