Physical demand remains very strong internationally as seen in continuingly high premiums

Gold rose 2.1% last week and is up another 2% in Asian and early European trading. Consolidation between $700/oz and $760/oz continues but the path of least resistance for the gold market is to the upside, especially as market and economic conditions look set to worsen in the coming weeks resulting in more safe haven demand.

Gold was one of the few asset classes or indices to rise last week and its performance was impressive in the light of the dollar being essentially flat for the week and the 10% fall in oil prices and some 4% fall in the Dow and S&P.

Physical demand remains very strong internationally as seen in continuingly high premiums, delays, rationing and unavailability of most popular bullion coin and bar products. Only larger exchange bars (Gold 100 oz and 400 oz and Silver 1000 oz) are readily available for immediate purchase and premiums are rising in this section of the market too. ETF gold holdings also show that demand remains robust with holdings remaining near record highs.

China's massive $600 billion stimulus plan is the first of many efforts by governments internationally to prevent a deflationary crash,  a global recession and a possible Depression. Emergency tax cuts also look increasingly likely. Equity markets in Asia and Europe have reacted favourably to the Chinese measures but as the ECB Chairman has warned China is one of the few nations that has the financial firepower to undertake such measures without undermining their national balance sheets.

Most western nations are not creditors as China is, rather most are debtors (some massively so) and their balance sheets are already in bad shape. The massive risk now facing industrialised economies is that they cannot fund their significant budget deficits through the issuance of government bonds as there simply are no little or no buyers.

Already in the world's second largest economy, Japan, parts of the bond market have seized up. As commented on in the FT's Lex today: "Talk about bad timing. Japan's government is pumping up its spending just as parts of the government bond market in the world's second biggest economy have seized up. Last month, just weeks before unveiling a $50bn fiscal stimulus package, Tokyo was forced to pull two auctions of inflation-linked bonds, and one of floating-rate bonds. These segments of the bond market, idiosyncratic at the best of times, and together accounting for some 8 per per cent of Japanese government debt, have turned positively dysfunctional since Lehman Brothers collapsed in September."

A malfunctioning or even worse a crash in the government bond markets may greatly curtail politicians (including President Elect Obama) and central bankers increasing efforts to stimulate the economy through government spending and tax cuts.

Lex concludes "with maths this ugly, the last thing the government needs is hostile bond markets."

This is especially the case with sharp and protracted recessions looking likely in most industrialised nations but especially the UK and US.

US Treasuries fell last week on worries over whether or not there will be willing buyers for the $55 billion in government debt to be auctioned next week.

With government bonds and currencies set to come under increasing pressure in the coming months - possibly sharply so - gold is set to again become the asset of last resort and will likely be used by prudent central banks and governments to back and restore confidence in their national currencies.