Gold’s message dismissed by equity bulls

Pretty much every major risk asset class is going up as traders seem to be having a final splurge before the age of ultra-loose monetary policy comes to an end.

Underlying optimism about the global economy is emboldening bulls, while supposedly flashing inflation warnings are being dismissed.

The FTSE All-World equity index is up 0.4 per cent to a fresh cyclical high, after Asian exchanges – Japan aside – shrugged off China’s out-of-hours monetary tightening.

The S&P 500 on Wall Street is up 0.2 per cent, while the Russell 2000 index of US small companies has hit an intraday peak. In Europe, the FTSE Eurofirst 300 is higher by 0.3 per cent, helped by stronger-than-expected German factory orders in February, and London’s FTSE 100 is gaining 0.6 per cent, boosted by miners as industrial commodities jump.

Gold is up 0.7 per cent to $1,460 an ounce having hit a record of $1,462, while silver has touched a fresh 31-year high of $39.75, having gone parabolic with its near-120 per cent rise in the past nine months.

The recent sharp rise for bullion is supposedly predicated on fears of building inflation pressures – US five-year breakeven rates, a gauge of inflation expectations, are above 2.4 per cent, the highest since July 2008. And it is true that many commodities are challenging record levels.

Brent crude has breached $123 a barrel for the first time since August 2008 as the conflict in Libya combined with worries about production out of Nigeria and Gabon to increase concerns about supply disruption at a time of increasing demand.

And corn hit a record of $7.7075 a bushel on Tuesday, up 15 per cent in four days, adding to fears that higher food prices could exacerbate civil unrest in poorer countries. US-traded corn is down 0.1 per cent at $7.6625.

Indeed, it is possibly a misjudgment to assume that bullion’s rise reflects inflation concerns. Other factors cited by analysts and commentators over recent days for the strength in precious metals have included: worries over the eurozone; geopolitical problems; Japan’s nuclear woes; and even the possible US government shutdown.

But none of these issues seems to be having lasting impact on other risky assets, so it would be strange if their influence was being applied to bullion alone. In which case, perhaps gold and silver’s rise is part and parcel of the overall bull market, powered by cheap funds. Nothing more.
ugal also came to the market, but had to pay punitive rates on its €1bn sale.

Meanwhile, any traders who shorted industrial metals after Tuesday’s China rate rise will be smarting. A weaker dollar on Wednesday and hopes that Beijing may be coming to the end of its tightening cycle have pushed the complex higher, with May copper up 2.4 per cent to $4.37 a pound. Speculators remain wedded to the “reflation trade” even as commercial heavyweights warn that demand is slowing.

Beijing’s fourth interest rate rise in five months would be expected to highlight growing concerns about gathering price pressures and the destabilising impact they may have on the global economy. But these are being easily absorbed.

The corollary to all these inflation signals is that markets must come to terms with the imminent ending of ultra-loose monetary policy in big developed economies.

Minutes from the US Federal Reserve’s last open market committee meeting, released on Tuesday, revealed that a faction of Fed members – the minutes did not say how large – believed it may be “appropriate to reduce the pace or overall size of the purchase programme”. US 10-year yields are a fraction firmer at 3.51 per cent, a near four-week high.

Most traders recognise that the Fed’s $600bn QE2 will end on schedule in June and futures put the likelihood of a US interest rate rise by the end of the year at 40 per cent.

The chances of a rate increase by the European Central Bank on Thursday, meanwhile, are placed nearer 100 per cent. The improving interest rate differential in favour of the euro has pushed the single currency to a 14-month high versus the dollar of $1.4317, and it is up 0.7 per cent at $1.4308.

In contrast, the Bank of England and Bank of Japan, which have their own policy decisions to reveal on the same day, are expected to stand pat.

Indeed, the earthquake in Japan will mean policy out of Tokyo will stay looser for longer and this is again putting pressure on the yen, which is down 1 per cent to an 11-month low against the euro of Y122.07. The dollar is broadly weaker, dipping 0.4 per cent on a trade-weighted basis.

The weaker yen lent support to Japanese exporters but Tokyo Electric Power, the operator of the troubled Fukushima nuclear power plant, fell heavily again even though the company managed to stop the outflow of highly radioactive water into the ocean from the plant’s No 2 reactor. The Nikkei 225 lost 0.3 per cent, leaving the FTSE Asia Pacific index up 0.1 per cent.

Excluding Japan, the region was up 0.8 per cent. Shares in Hong Kong and Shanghai rose 0.6 per cent and 1.1 per cent respectively, as investors took the view that further aggressive tightening of Beijing’s monetary policy was unlikely this year.

Gold producers in Sydney surged on higher gold prices, pushing the S&P/ASX 200 up 0.3 per cent, while investors in Seoul grew cautious after the Kospi hit a record high on Tuesday.