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Analysts Discuss Inflation as Dollar Rises

Release Date: 
Thursday, January 5, 2012

Market dynamics on both sides of the Atlantic pushed the dollar higher and gold lower on Thursday. Gold was trading at $1606.60 per ounce on the New York Spot market, trading at $1606.60 per ounce at 7:17 a.m. Pacific Time with silver at $29.08 per ounce.

Weekly unemployment claims in the U.S. fell to the lowest level since June 2008 as private sector job creation rose by a better-than-expected 325,000 in December, fueling hopes for a turnaround in the labor market. 

The euro reached a 15-month low against the dollar on debt-related weakness in euro zone banks, continued problems in the Greece, concerns over France losing its AAA bond rating, and upcoming uncertain bond sales in Spain and Italy that will be closely watched by investors. Greek Prime Minister Lucas Papademos said the nation may face economic collapse as soon as March.

George Gero, senior vice president at RBC Capital Markets, said "Inflation may rear its head when we see fiscal stimulus on two continents." Jeffrey Wright, senior research analyst at Global Hunter Securities, said "I think we are seeing some signs towards moderate inflationary pressure not only in commodities but in finished goods and anything to do with inflation is good for gold."

"We've been in such a low inflationary environment, inflation between 2-3%, and if inflation increased a little bit above 3% that is a big move compared to the relative stable inflation environment," said Wright.

Once Europe's crisis is resolved, the dollar could stop gaining against the euro as investors refocus on the U.S.'s continuing fiscal problems. "They are going to go 'what about us,'" said Wright. "We have no ability to repay this debt and the only way to pay it is to devalue the currency ... gold will definitely come back into focus [when] depreciating the dollar [becomes] a practical policy."

Concerns about Iran’s nuclear aspirations continue to affect markets, according James Moore, research analyst at FastMarkets.com, who commented, "tensions between Iran and the West will continue to bolster gold, as safe-haven interest increases."

(Sources: "Gold Declines as Dollar Strengthens, Saps Demand, on Debt-Crisis Concern," Bloomberg, January 5, 2012; "PRECIOUS-Gold slips on Europe debt concerns," Reuters, January 5, 2012; "Gold Prices Fall as Dollar Gains (Update 1)," TheStreet, January 5, 2012; "Gold Stalls as Stronger Dollar Limits Gains," CNBC, January 5, 2012)

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