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Analysts Expect Gold Prices to Normalize

Release Date: 
Friday, September 30, 2011

Gold prices moved higher after Germany approved increases to the euro zone bailout fund on Friday. Precious metals analysts discussed sovereign debt problems along with gold’s response to perceived risk in the financial markets and declines in the equity markets. Bank of America-Merrill Lynch and HSBC continue to have a favorable view of gold despite recent market swings.

"Any time you have a sharp spike in risk aversion, gold prices tend to come off, and then once the markets start to normalize, prices tend to benefit," said Bank of America-Merrill Lynch analyst Michael Widmer, discussing recent downward moves in the financial markets. "The fact that gold gets caught up makes perfect sense -- if you've got margin calls... and other positions under water, that will cause selling," he added.

"Ultimately the fundamentals that we thought were positive for gold are still in place -- issues in Europe and the United States, slowing GDP growth, central banks doing their magic," Widmer said.

"The price drops were driven by investors' reaction to declines in equities, and were a combination of the need to raise cash or lock in profits," said HSBC in a note. "As long as ETF holdings remain steady, we expect gold prices eventually to stabilize and resume their long-term advance."

"It seems that there are still hurdles ahead before the European debt crisis is resolved," said Ong Yi Ling, an analyst at Phillip Futures in Singapore. "By mid-October, Greece will start to run out of money and has to receive the next tranche of aid to avoid bankruptcy. I think the outlook for the euro zone is still uncertain. The successful German vote provides a temporary bout of optimism and more decisive policy action is still needed."

"Gold is the one currency without debt liabilities, so if you are worried about the debt situation in the U.S. and euro zone, an obvious currency to look towards is gold," said Danske Bank analyst Christin Tuxen. "There are still reasons for it to be regarded as a safe haven."

(Source: "PRECIOUS-Gold rises but set for worst month in nearly 3 years," Reuters, September 30, 2011; "PRECIOUS-Gold ticks higher; heads for worst month since Oct '08," Reuters, September 30, 2011; "PRECIOUS-Gold rises 1 pct as physical buying supports," Reuters, September 29, 2011)

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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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