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Analysts: Higher Gold Prices on Economy, Demand

Release Date: 
Thursday, October 6, 2011

European stocks fell after a European Central Bank decision to hold interest rates steady, pressuring gold as some investors in the market maintained hopes for a rate cut. The bank raised rates twice earlier this year but, given increasing concerns that the euro zone economy would struggle to recover from its slowdown and the financial crisis, some market participants anticipated lower interest rates. The ECB's decision to keep rates at current levels was otherwise broadly expected. Though rates were not cut, the bank is expected to introduce new liquidity measures to help European banks to weather the region’s debt crisis.

German Chancellor Angela Merkel said Europe’s rescue fund will only be used as a last resort to save banks and that investors may have to take deeper losses as part of any Greek bailout. U.S. Treasury Secretary Timothy F. Geithner was expected to tell lawmakers that the ongoing European financial crisis is increasing the risks to global growth.

Gold benefited from speculation that Europe’s sovereign-debt crisis won’t be contained, spurring demand for safe haven assets.

Analysts at Hermes Investment Management, LGT Capital Management and UBS expect higher prices for the precious metal and see buying opportunities at current price levels based on physical demand and long-term macroeconomic factors.

Gold may rise to $1,850 an ounce by December, according to David Hemming, who helps manage approximately $1.7 billion in five commodities funds for Hermes Investment Management Ltd.. "We look to be long gold because of our concerns surrounding Europe, because the problems don’t look to have been solved in a meaningful way," Hemming said.

"After the first round of liquidity constraints and the global sell-off including gold, the investment case in 2012 for gold due to strong fundamental and macroeconomic factors is regaining momentum," Bayram Dincer, an analyst at LGT Capital Management in Switzerland. "In the last few trading days, $1,600 levels offer a good buying opportunity."

Physical demand for gold remains strong, particularly in Asia. This demand is expected to improve as India’s festival season begins. "With key festivals approaching in the next months, prices near $1,600/oz are attracting physical buyers eager to preempt the scramble for metal at the last minute," UBS said in a note.

(Source: "Gold Advances for a Second Day as European Crisis Spurs Investor Demand," Bloomberg, October 6, 2011 "Spot Gold Rises As Physical Demand Remains Robust," Wall Street Journal, October 6, 2011; "PRECIOUS-Gold pares gains after ECB holds rates," Reuters, October 6, 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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