Secret talks had been held between China and Middle Eastern states about changing the pricing of oil
Gold Prices at Record Amid Reports of U.S. Dollar’s Demise
December 31, 2010
• Reports of secret talks over ending the dollar pricing of oil
• Money flows into commodities as fears of inflation grow
Gold prices hit a record high of $1,040 an ounce today , as renewed speculation about the declining power of the dollar as the world’s reserve currency sent investors stampeding into commodities.
Reports that secret talks had been held between China and Middle Eastern states about changing the pricing of oil from dollars to a basket of currencies and gold sent the greenback into a renewed slide on foreign exchange markets, despite denials from the governments involved. By late afternoon the euro was up by 0.7% against the dollar at $1.47.
Share prices also rallied as investors’ hopes that global recovery was gaining ground were boosted by news that the Australian central bank had become the first to increase interest rates since the world recession began.
The FTSE 100 closed up 113 points, at 5138, with mining, oil and gas companies contributing much of the increase. The Dow Jones industrial average of leading shares was up 157 points by lunchtime in New York.
Commodity prices from gold to sugar have jumped in recent weeks as Asia’s rebound has fuelled hopes of global recovery. Investors have begun to fret about resurgent inflation, turning to natural resources as a “safe haven”. Rumours of a shift in the pricing of oil helped feed this feverish mood.
Julian Jessop of research house Capital Economics said gold prices could push even higher, but he expected them to fall back in the longer term. “A mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices,” he said.
He added that although gold supplies are finite – a quality that attracts die-hard enthusiasts nostalgic for the days of the Gold Standard – periods of unusually high prices tend to see used gold, such as old jewellery, put up for sale. “You can very, very quickly get a flood of gold back to the market,” he said.
Since the credit crisis, there has been growing debate about the role of the dollar as the world’s reserve currency, which has helped America to borrow cheaply from the rest of the world for decades.
World Bank president Robert Zoellick warned last week that the US could not take the dollar’s status for granted. “Looking forward, there will increasingly be other options,” he said, and warned that confidence in the dollar would depend on how successfully Washington managed to deal with its deficits, and fix the world’s largest economy without unleashing a bout of inflation.
Steps have already been taken to loosen the dollar’s grip: Iran has begun pricing oil exports in euros; China recently launched the first yuan-denominated bond open to outside investors in a step towards making its currency exchangeable on international markets; and Asian central banks are piling reserves into gold as well as the Treasury bills that have been the favoured investment for the past decade.
China, Russia and other emerging market governments have complained bitterly at international gatherings about the overweening economic power of the US. “Throughout this year, China has questioned the dollar as the medium of exchange, and questioned the dollar as a store of value,” said Gerard Lyons, chief economist at Standard Chartered bank.
China and other developing countries that have earned a vast bounty by exporting cut-price consumer goods to the US over the past decade have been infuriated by the way the collapse of America’s banking system has sent shockwaves throughout the world economy.
However, analysts said it would probably take many years for the dollar to be replaced. “The decline of sterling really goes from the end of the first world war to the Wilson devaluation of 1967 – and the decline of the dollar probably began when Nixon broke the link with gold, so we’ve probably got a couple of decades to go,” said Gabriel Stein, of Lombard Street Research. “Currencies don’t remain dominant forever,” he said.
He added that China and the Middle Eastern oil producers are also still holding huge dollar-denominated reserves, so that they would suffer from a sudden decline in the value of the greenback.
Lyons said the most likely outcome was a continuation of China’s policy of “passive diversification”. Instead of dumping dollar assets, which could depress the currency’s value, it uses surplus cash to buy other assets, including gold and euros.
• Reports of secret talks over ending the dollar pricing of oil
• Money flows into commodities as fears of inflation grow
Gold prices hit a record high of $1,040 an ounce today , as renewed speculation about the declining power of the dollar as the world’s reserve currency sent investors stampeding into commodities.
Reports that secret talks had been held between China and Middle Eastern states about changing the pricing of oil from dollars to a basket of currencies and gold sent the greenback into a renewed slide on foreign exchange markets, despite denials from the governments involved. By late afternoon the euro was up by 0.7% against the dollar at $1.47.
Share prices also rallied as investors’ hopes that global recovery was gaining ground were boosted by news that the Australian central bank had become the first to increase interest rates since the world recession began.
The FTSE 100 closed up 113 points, at 5138, with mining, oil and gas companies contributing much of the increase. The Dow Jones industrial average of leading shares was up 157 points by lunchtime in New York.
Commodity prices from gold to sugar have jumped in recent weeks as Asia’s rebound has fuelled hopes of global recovery. Investors have begun to fret about resurgent inflation, turning to natural resources as a “safe haven”. Rumours of a shift in the pricing of oil helped feed this feverish mood.
Julian Jessop of research house Capital Economics said gold prices could push even higher, but he expected them to fall back in the longer term. “A mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices,” he said.
He added that although gold supplies are finite – a quality that attracts die-hard enthusiasts nostalgic for the days of the Gold Standard – periods of unusually high prices tend to see used gold, such as old jewellery, put up for sale. “You can very, very quickly get a flood of gold back to the market,” he said.
Since the credit crisis, there has been growing debate about the role of the dollar as the world’s reserve currency, which has helped America to borrow cheaply from the rest of the world for decades.
World Bank president Robert Zoellick warned last week that the US could not take the dollar’s status for granted. “Looking forward, there will increasingly be other options,” he said, and warned that confidence in the dollar would depend on how successfully Washington managed to deal with its deficits, and fix the world’s largest economy without unleashing a bout of inflation.
Steps have already been taken to loosen the dollar’s grip: Iran has begun pricing oil exports in euros; China recently launched the first yuan-denominated bond open to outside investors in a step towards making its currency exchangeable on international markets; and Asian central banks are piling reserves into gold as well as the Treasury bills that have been the favoured investment for the past decade.
China, Russia and other emerging market governments have complained bitterly at international gatherings about the overweening economic power of the US. “Throughout this year, China has questioned the dollar as the medium of exchange, and questioned the dollar as a store of value,” said Gerard Lyons, chief economist at Standard Chartered bank.
China and other developing countries that have earned a vast bounty by exporting cut-price consumer goods to the US over the past decade have been infuriated by the way the collapse of America’s banking system has sent shockwaves throughout the world economy.
However, analysts said it would probably take many years for the dollar to be replaced. “The decline of sterling really goes from the end of the first world war to the Wilson devaluation of 1967 – and the decline of the dollar probably began when Nixon broke the link with gold, so we’ve probably got a couple of decades to go,” said Gabriel Stein, of Lombard Street Research. “Currencies don’t remain dominant forever,” he said.
He added that China and the Middle Eastern oil producers are also still holding huge dollar-denominated reserves, so that they would suffer from a sudden decline in the value of the greenback.
Lyons said the most likely outcome was a continuation of China’s policy of “passive diversification”. Instead of dumping dollar assets, which could depress the currency’s value, it uses surplus cash to buy other assets, including gold and euros.
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