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Analyst Sees Gold As Portfolio Diversifier for Banks, Investors

Release Date: 
Wednesday, January 23, 2013

The price of gold fell slightly on profit taking and progress on debt ceiling talks after gold reached a one-month high on Tuesday.  Gold was $3.50 lower at 7:52 a.m. Pacific Time on the New York Spot Market, trading at $1,689.30 per ounce.  Spot silver was $0.05 higher at $32.36 per ounce.  (Click here for the most current spot prices.)

The. House of Representatives could pass a bill today to temporarily suspend the nation’s $16.4 trillion borrowing limit until May 19.  At that point, the U.S. borrowing debt ceiling  would be automatically raised to reflect the national debt at that time.   

According to Nataxis analyst Nic Brown, “the debate over the debt ceiling and automatic spending cuts, which must be finalized by end-February, should give us a clear indication which path U.S. politicians choose to take; repay your debt or inflate it away… If U.S. fiscal austerity proves either politically unpalatable or economically impossible, we could be looking at a weaker dollar, cuts to U.S. credit ratings and potentially significantly higher gold prices.”

Martin Arnold, senior analyst at ETF Securities, said there is room for precious metals in any portfolio as uncertainty still dominates the current environment.  “Once you see gold tick above that key $1,700 mark, that’s quite a key technical level, then you start looking at the record highs, certainly in nominal terms, around the $1,900s,” he said.

“Gold is there as a diversifier in case of the worst possible scenario coming to pass,” Mr. Arnold commented.  “You’re seeing central banks diversifying their foreign exchange reserves for good reason.  There’s debasement of foreign currencies, and so we’re seeing a lot of private investors doing the same.   So, you’re only talking about 0-10% in terms of your holding, just in case.  There are some very good reasons that we’ve mentioned to be holding gold, [such as] if you’re seeing the dollar weaken…you’re also getting a little bit more support from that angle, as well.”

Yesterday’s announcement of monetary easing from the Bank of Japan and a doubling of its inflation target to 2% has been supporting gold.  "We continue to see a lot of monetary easing from the Bank of Japan and other central banks, and we think ultimately this will pick up gold sentiment once again," said Standard Bank analyst Walter de Wet.

In a note Tuesday, Julian Phillips, founder of GoldForecaster.com, said he expects Japanese investors will be “fully aware that this policy will weaken the buying power of the yen both at home and abroad” and expects them to favor gold to turn the currency loss into a potential gain.

(Sources:  “Gold May Fall on U.S. Debt Ceiling Vote, Indian Demand,” Bloomberg, January 23, 2013; “Gold futures slip from one-month highs,” Marketwatch, January 23, 2013; “Gold Stalls as US Debt Talks Make Progress,” CNBC, January 23, 2013; “ANALYSTS VIEW-Outlook for precious metals in 2013,” CNBC, January 22, 2013; “Should You Buy Precious Metals? CNBC, January 22, 2013; “Gold ends back above $1,690 on safe-haven appeal,” Marketwatch, January 22, 2013)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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