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Analysts: Gold Will Gain from Swiss Currency Cap

Release Date: 
Wednesday, September 7, 2011

Continued concerns over euro zone debt and the recent news from the Swiss National Bank (SNB) pegging Switzerland's currency directly to the euro are likely to lift gold in the longer term, according to analysts at UBS and Barclays Capital. The SNB capped the Swiss franc to fight its rapid appreciation relative to other currencies.

"Now that the SNB has entered the intervention arena, FX [foreign exchange] markets are on high alert for the BoJ [Bank of Japan] to follow suit. So in theory, gold should be a considerable beneficiary ahead," Swiss bank UBS said in a note.

"Efforts to dampen currency appreciation mean gold moves up the pecking order of preferred safe havens," UBS wrote. "This is crucially important given that safe havens are currently sought as alternatives to equities and other assets while macro concerns and European sovereign issues prevail."

"What it does do is to reduce the number of ‘safe-haven' assets: Admittedly, only by one, but they have become increasingly scarce. The measure therefore adds to the attractiveness of the U.S. dollar, the Japanese yen and gold, in our opinion," said analysts at Barclays Capital. They predict that the move by the Swiss central bank is unlikely to alleviate global market turmoil since the Swiss economy is too small to have a significant impact on the major problems facing global asset markets, including the euro-zone crisis and weakening global growth.

In positive news for European markets, Germany's top court today rejected three constitutional challenges to the country's participation in the euro rescue funds. However, sizable debt issues continue to weigh on governments and investors. "With euro-zone debt problems likely to weigh on risk sentiment, we expect the buy-the-dip mentality to help underpin the metal," wrote James Moore, an analyst at TheBullionDesk.com in London, commenting on gold today.

"There is good physical buying interest every time the market dips. As long as no real solution is found regarding economies of the world, we'll be attempting new highs," said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva.

Gold prices are up approximately 30 percent this year and over 500% over the last ten years.

(Sources: "PRECIOUS-Gold drops further from record as stocks rally," Reuters, September 7, 2011; "Gold Drops for Second Day as Equity Rebound Trims Haven Investment Demand," Bloomberg, September 7, 2011; "Gold futures drop as global equities rebound," MarketWatch, September 7, 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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