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Analysts, Hedge Funds Expect Loose Fiscal Policy

Release Date: 
Tuesday, June 19, 2012

Gold prices moved slightly lower on Tuesday as investors awaited the outcome of a two-day Fed meeting starting today. Gold was $1.20 lower at 7:26 a.m. Pacific Time on the New York Spot market, trading at $1,628.50 per ounce. Spot silver was $0.04 higher at the same time, trading at $28.88 per ounce. (Click here for the most current spot prices.)

Several analysts focused on the increased likelihood of additional liquidity from the Fed and other central banks. "Clearly the shift towards easier money is much more necessary now than it was three months ago. That's good news for gold," said Adrian Day, president of Adrian Day Asset Management.

Gold prices may rise through 2012 and into 2013, driven by a growing likelihood of policy action by central banks, BNP Paribas precious metals strategist Anne-Laure Tremblay said in a note to clients. "Probable actions include interest rate cuts by the European Central Bank and the People's Bank of China [and] further quantitative easing by the Federal Reserve," which would likely support gold buying, Tremblay said.

"Quantitative easing, or an expansion of a central bank's balance sheet, is more favorable for gold prices...[as it] tends to have a strong negative impact on the U.S. dollar and is also more likely to raise inflationary expectations," she said.

Hedge funds raised their bullish commodity bets in the week ending June 12 on speculation that central banks will announce additional economic stimulus. "The markets are signaling they expect some kind of central monetary easing," said Peter Sorrentino, senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.7 billion of assets. "That tends to bode well for the type of assets that get re-priced very quickly when that happens, and that's the commodity complex."

Investors are "...looking at the very real problem of contagion through the Eurozone," said John Stephenson, who helps manage $2.6 billion at First Asset Investment Management Inc. in Toronto. "People are scared, and most of the policy solutions to the things that are scaring them involve more quantitative easing by central banks, which basically means pumping out more paper currency," said Cameron Brandt, director of research for Cambridge, Massachusetts- based EPFR Global.  Those are "two good reasons to get some assets into gold," he said.

We're probably in the later stages of the commodity correction," said John Bailey, the founder and chief executive officer of Stamford, Connecticut-based Spruce Private Investors LLC, which advises clients on $3 billion of assets. "We're looking for a policy-led rebound in the second half."

(Source: "PRECIOUS-Gold dips as buyers move to sidelines ahead of Fed," Reuters, June 19, 2012; "Gold trades lower, loses safe-haven bids," MarketWatch, June 19, 2012; "Hedge Funds Boost Bullish Bets As Stimulus Pressure Rises," Bloomberg, June 18, 2012)

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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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