Gold Mining, Inflation and Deflation

Gold Bullion rallied back to $1730 per ounce this morning in London, after drifting lower overnight, as the Euro jumped half-a-cent against the Dollar following a report that the German government is considering a plan to speed up the payment of bailout money to Greece.

"There had been a decoupling in the relationship between gold and the Dollar in terms of the daily trading range, and now we are seeing a readjustment," says LGT Capital Management analyst Bayram Dincer.

German tabloid Bild reports that the German government is proposing to bundle the next three tranches of Greece's bailout into one payment of around €44 billion, citing government sources. Greece has to meet a €5 billion debt repayment this week.

Earlier in the day, stock markets and the Euro fell to two-month lows after a public disagreement between policymakers over Greece and news that Greece's next bailout tranche, worth €31.3 billion, will be delayed for another week.

Greece's deadline reducing its debt-to-GDP ratio to 120% will be extended from 2020 to 2022, Jean-Claude Juncker, chairman of the Eurogroup of single currency finance ministers, told reporters.

"In our view, the appropriate timetable is 120% by 2020," countered International Monetary Fund chief Christine Lagarde.

"We clearly have different views [on whether to give Greece more time]," she added.

Lagarde "appeared exasperated" with Juncker at the press conference, the Financial Times reports. The FT adds that the IMF has for months argued that there should be a further write down of Greek debt, in addition to the restructuring deal back in February that saw losses imposed on private sector creditors.

In order for Greece to reduce its debt to 120% by 2020, "a much more drastic debt stock reduction (possibly north of €80 billion in total) will be required," says Goldman Sachs senior economist Themistoklis Fiotakis.

"This seems politically infeasible at present. We think a more likely outcome will involve some debt relief, continued official sector funding...and a continued uncertain Greek debt profile [which will] hold back a Greek recovery relative to a more decisive write-off." 

Silver Bullion meantime climbed to $32.67 an ounce, in line with where it started the week, while other industrial commodities ticked lower and US Treasury bond prices gained.

"The fiscal cliff is being priced in because it's the biggest risk facing the market right now," says Priya Misra, head of US rates strategy at Bank of America Merrill Lynch in New York, referring to the combination of tax rises and spending cuts due at the start of next year unless US lawmakers agree a deal to avoid them.

Here in the UK, inflation rose to its highest level since May last month at 2.7%, official consumer price index data published Tuesday show.

"The largest upward pressure came from university tuition fees, followed by food and housing," the Office for National Statistics said.

Fees paid by undergraduates have almost trebled in the last year, after the government raised the cap on what universities can charge from £3375 to £9000.

"Where do we go from here?" Scotiabank economist asks Alan Clarke.

 Onwards and upwards. Utility bill increases are on their way. We've also got the effect of the US drought and increased food prices to factor in...I don't think we're going to get anything like the 2% [Bank of England] inflation target."

Inflation has been above the Bank's 2% target in every month since November 2009.

"Growth for 2013 is likely to be revised down," adds Chris Williamson, economist at financial information firm Markit.

"The higher cost of living caused by the rise in inflation will hit consumer spending [while]worries about the impact of austerity and wider concerns about the Eurozone and US fiscal woes look set to ensure that domestic demand, investment and exports all remain subdued."

Over in India, traditionally the world's biggest Gold Buying nation, rural gold sales during today's Diwali festival were hit by this year's poor monsoon, the Economic Times of India reports.

"Despite the weddings and traditional gold dowries that are of high importance during this period, demand once again stalled," adds a report from refiner Heraeus.

Retail Gold Bullion demand during Sunday's Dhanteras festival was however up 8.3% on last year, according to the Bombay Bullion Association.

The Rupee is down 11% against the Dollar from its level during last year's Diwali.

Gold Mining firms are discovering gold at a decreasing rate despite spending a record $8 billion on exploration last year, according to Jamie Sokalsky, chief executive of world's largest gold producer Barrick Gold.

"It's getting harder to find large deposits and to get those deposits into production takes at least twice as long as it might have taken a decade ago," Sokalsky told Bloomberg.

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