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Analysts Say Gold Protects Purchasing Power

Release Date: 
Monday, June 4, 2012

The price of gold moved lower today following the metal’s sharp rise on Friday. Gold was $6.00 lower as of 7:01 a.m. Pacific Time on the New York Spot Market, trading at $1,621.30 per ounce. Spot silver was $0.34 lower, trading at $28.47 per ounce. (Click here for the most current spot prices.)

"The May employment report suggested to our economists that the labor market recovery in the U.S. has lost significant steam in the recent months," analysts with Barclays said in a note. "In their view, the likelihood that the Fed will renew another round of quantitative easing has increased as a result of the report."

"Up until very recently, lower U.S. bond yields were also accompanied by lower gold prices... primarily because as the euro zone sovereign crisis intensified, capital moved into U.S. Treasuries and other perceived safe government bonds," HSBC said in a note. "As the dollar rallied in reaction to capital inflows, gold prices, which are negatively correlated with the U.S. dollar, fell." However, "gold prices appear to have very recently broken away from this relationship and have turned higher despite further declines in U.S. Treasury yields, which have reached 60-year lows," HSBC wrote. "Low U.S. and German bond yields leave investors with few quality assets to choose from and may benefit gold."

George Gero, Sr. VP. RBC Capital Markets, explained reasons to hold gold despite the recently strengthening dollar. "Gold is what maintains your purchasing power over years and centuries…It’s a fully convertible asset into many different currencies in the world at any one time. It’s liquid and it’s portable. So those that tend to put gold into their portfolio are sort of buying long term insurance against loss of purchasing power."

Jeff Clark, a senior precious metals analyst with Casey Research, said, "Gold is becoming less of an investment and more of a necessity; once the economy improves-whenever and however-expect a serious bout of inflation, something that will erode the purchasing power of cash and cash-equivalent investments. In fact, not buying gold will likely be a very costly blow to our future standard of living. Based on the historical performance of gold and silver, we won't experience any inflation in the things we buy 10 years from now if we pay with the proceeds from precious metals sales. Think about that: if gas prices double, we pay today's price if we sell some gold or silver to cover it. Ditto food. In 1964, three Roosevelt dimes bought one gallon of gas; today it only takes two of those dimes. This is one of the big reasons we're accumulating physical metal."

Robert Cohen, vice president and portfolio manager for GCIC, said, "Gold is a monetary asset that works through time. If you wanted to protect your purchasing power, you could have put an ounce of gold in your safety deposit box in 1971 or 16.5 bbl oil in your garage, and today, 41 years later, swapped them at the same ratio. That tells me that gold keeps its purchasing power. Gold is an ideal way to protect your purchasing power."

(Source: "PRECIOUS METALS: Comex Gold Steady After Friday's Surge," Wall Street Journal, June 4, 2012; "Raging gold bull vs muted gold bear - Grandich vs Palmer," Mineweb, June 4, 2012; "Is this the turning point for gold (upwards) and equities (down)?" Mineweb, June 4, 2012; "Gold futures hold gains in electronic trading,"MarketWatch, June 4, 2012; "PRECIOUS-Gold pauses after rally sparked by U.S. data," Reuters, June 4, 2012; "Comfortable with $1600 gold, $95 oil and $3.75 copper – Cohen," Mineweb, May 31, 2012; "Strong Dollar On ly Delaying Gold's Rise," The Street, May 30, 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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