Gold Price Soars on Fear of US Inflation

Ambrose Evans-Pritchard
12:13am GMT 23/02/2007

Fresh signs that inflation is raising its ugly head again in the United States sent gold rocketing $23.50 to a nine-month high of $680.50 in late trading in New York.

US core consumer prices jumped 0.3pc in January led by medical care and drugs, the sharpest rise since June and fresh evidence that inflation is becoming lodged more deeply across the economy. Core prices are now up 2.7pc over the past 12 months.

The bombshell data came as minutes from the US Federal Reserve showed that inflation was still the "dominant concern" of the policy-making board.

Adding to the incendiary mix, the index of leading indicators published by the New York Conference Board rose for a second month in January, suggesting that the economy was gathering steam again after the autumn downturn.

The data triggered the sharpest one-day rise in gold since the bull market began in 2001 as bullion re-found its traditional role as a "hard money" hedge. It now looks poised to challenge the 24-year peak of $730 reached in May. Equities fared less well as the Dow slipped amid mounting jitters over the risk of significantly higher interest rates - a risk that is not priced into the current "Goldilocks" assumptions of the markets.

Federal Reserve vice-president Donald Kohn warned that investors had mis-priced the level of risk and were assuming a "very benign" climate that might not last.

The board minutes said "all members agreed that some inflation risks remained", indicating that even doves feared price pressures were the greater menace.

"This is a wake-up call to the markets," said Mickey Levy, chief economist at Bank of America.
Overall bank credit in the US has expanded by 10pc or $763bn over the last year and mortgage finance is up 14.3pc, despite the housing and automobile troubles.

Although the Federal Reserve no longer publishes M3 broad money figures, reconstructed data shows that it grew 10.3pc in 2006 - well over the safe speed limit. This sea of liquidity now appears to be leaking into High Street price pressures, renewing enthusiasm for gold.