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Bernanke Aims to Continue QE, Underpinning Gold

Release Date: 
Saturday, March 2, 2013

American Advisor host Joe Battaglia provides a wrap-up of the week's precious metals news along with important commentary every week on the American Advisor Week in Review audio program. Click here to listen.

Gold prices were volatile this week as the market reacted to various economic news including Federal Reserve Chairman Bernanke’s continued support of quantitative easing policies. In his semi-annual testimony to the Senate Banking Committee, the Fed Chairman favored continuing a $85 billion per month program of Federal Reserve bond purchases. Gold was $4.40 lower this week, settling at $1,577.80 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $0.02 higher, closing at $28.68 per ounce.

(Note: At last Friday’s Close, gold was $1,582.50 per ounce and silver was $28.66 per ounce.)

"The market is a little less concerned about a premature exit of quantitative easing," said Nick Trevethan, senior commodity strategist at ANZ. "Don't forget that the Fed's focus is on jobs and inflation. The job market has stabilized, but we are not seeing efficient job growth to make the exit of QE look imminent. There is still a long way to go,” he said.

Bernanke’s testimony indicated to traders that a course change from the Fed wasn't imminent, said Kurt Pfafflin, a senior broker with Daniels Trading in Chicago. "We've got an over sold [gold] market.”

Fiscal issues involving U.S. debt provided some support for gold. The U.S. government’s “inability to agree on a taxing and spending plan by the March 1 sequestration deadline is added to a nervous and uncertain atmosphere in the world market place this week,” said Jim Wyckoff, senior analyst at Kitco.com. The analyst sees this as a “supportive factor for the safe-haven investment assets this week.”

On Thursday, gold moved lower on improved U.S. economic growth data for the fourth quarter. "Metals are taking a breather following the last two days of gains," said Matt Zeman, head of trading at Kingsview Financial. Commerzbank analysts said they did not “believe the current weakness in the price of gold to be sustainable.”

Research from Bespoke Investments Groups discusses gold’s rise during Fed Chairman Benrnanke’s tenure during which gold prices have nearly tripled. When appointed to his post on February 1, 2006, gold was $574 per ounce. Since then, gold has gain $1,021.70, a 178% jump.

Italy faced political turmoil after the anti-establishment 5-Star Movement of comedian Beppe Grillo become the strongest party in the country’s elections Tuesday. IG market strategist Stan Shamu said a political impasse in Italy could be negative for financial markets and may lead to a rise in gold prices.

"(The) Italian elections have been the first of the 2013 scheduled event risks to blow a hole in risk appetite. That the anti-establishment 5-Star movement was the party to win the single largest share of the vote proves a sharp reminder to Brussels that fiscal austerity can potentially be undone with a popular vote," Dutch bank ING said in a note.

Silvio Berlusconi's center-right coalition has taken an anti-austerity stance that has drawn voter support in Italy. "The prospect of a Berlusconi win is positive for gold and silver," noted Mr. Zeman.

As uncertainty over Italy’s commitment to austerity grows, europeans are likely to stockpile precious metals as a hedge, Kingsview Financial analyst Matt Zeman said. “Rising uncertainty in Europe prompted safe-haven buying," ANZ concurred.

Central banks in Russia and Kazakhstan increased their reserves of gold for a fourth straight month in January, according to IMF data. “Central bank buying remains a feature and is providing some support,” said Steve Scacalossi, vice president at TD Securities. “We are also hearing of strong Chinese demand at lower levels.” Gold purchases from China were “impressive” last week and continue this week, agreed Joni Teves, an analyst at UBS.

In Japan, Haruhiko Kuroda was nominated for the position of governor at the Bank of Japan on Thursday, fueling expectations of further quantitative easing. The dollar gained against the yen after the news, a move that could benefit gold, said HSBC metal analyst James Steel. “Both the Japanese yen and the Swiss franc are historically viewed as safe-haven assets, and depreciation of the two may lead investors to choose bullion, a currency that cannot be printed, which is also regarded as a safe-haven asset,” Mr. Steel noted.

Commerzbank analysts noted several factors that may suggest higher gold prices: “the Indian finance minister…announced no further hikes in gold import duties in his annual budget speech…Coupled with the lower local prices of late, this could give rise to growing gold demand in India in future.” Gold buyers in India are benefiting from a stronger rupee, which has made gold prices attractive for Indian jewelers and consumers. "Buying in China has also returned to the market in force," Barclays analyst Suki Cooper said.

Despite gold’s recent pullback, “there are still plenty of people who are bullish long term,” said Mitsui Precious Metals analyst David Jollie.

Adrian Day, of Adrian Day Asset Management, who manages about $170 million in assets, believes that increased public confidence in a recovering U.S. economy and a strong global stock market have recently reduced the perceived need for a safe haven asset such as gold. However, he noted a purchasing opportunity given the current sentiment based on other factors. “We see this as a good level to be buying. There is no expectation of serious tightening in any major economy anytime soon,” he said.

Other money managers continue to accumulate or hold gold. Vishaal Bhuyan, who runs the $20 million hedge fund Nariman Point LLC, says he has been buying physical gold "on dips," on a bet that interest rates won't soar…If you look at gold as protection, you need to own it in coins or bars and not an ETF," said Mr. Bhuyan.

Billionaire investor John Paulson's hedge fund, PaulsonandCo., is holding on to much of its gold in the current environment. Mr. Paulson told clients that he believes gold will rise over the long term, as global central banks expand their respective money supplies and inflation eventually picks up.
Strategists at Capital Economics predict gold may reach a record $2,000 per ounce this year. They gave Europe’s debt situation as one reason to expect gold buying to increase, despite recent consolidations. “An extended pause is not a sufficient basis for arguing that the bull market is over,” they said.

"Investment demand in gold is picking up," said Ronald Leung, a director at Lee Cheong Gold Dealers in Hong Kong. Investors are anticipating another round of crisis in Europe, he said. Mr. Leung expects gold to move toward the range of $1,625 to $1,630 in the near term.

UBS analyst Julien Garren wrote the U.S. economy’s influence on commodity prices is a delicate dance but the current dynamics can benefit gold in Q3 of 2013 if investors are patient. “A recovery that led to strong job gains and an unexpected rise in inflation would likely force the Fed to end QE, and that would be very bearish for commodities. However, given the Fed voters’ highly dovish bias, we expect them to continue printing into 3Q13 when we in commodity strategy, in contrast to our economists, expect global growth to lose momentum. That sets up a major gold rally in Q3.”

(Sources: Sources: Gold up; analysts say investor fatigue has set in,” Wall Street Journal, March 1, 2013; “Big Investors Differ on Gold's Prospects,” Marketwatch, March 1, 2013; “Gold Futures Fall on U.S. Economic Data, Stronger Dollar,” Wall Street Journal, February 28, 2013 “Gold futures waver; firmer dollar adds pressure,” Marketwatch, February 28, 2013; “Gold falls a second day, set for monthly loss,” Marketwatch, February 28, 2013; “Gold Demand in India Seen Rebounding After Import Tax Maintained,” Bloomberg, February 28, 2013; “Gold price nearly triples during Bernanke tenure: Bespoke,” Marketwatch, February 27, 2013; “Comex Gold Prices Retreat From One-Week High,” Wall Street Journal, February 27, 2013; “Gold Slips on Profit-Taking in Asia; Precious Metals Mixed,” Wall Street Journal, February 27, 2013; ; “PRECIOUS-Gold holds near 1-1/2-week high as Bernanke backs stimulus,” Reuters, February 27, 2013 “Gold pulls back but holds above $1,600,” Marketwatch, February 27, 2013; “Gold Reclaims $1,600,” Wall Street Journal, February 26, 2013; “Comex Gold Extends Rise as Bernanke Underlines Support for QE,” Wall Street Journal, February 26, 2013; “Gold Moving Sideways in Asia; Precious Metals Mixed,” Wall Street Journal, February 26, 2013; “Gold futures rally past $1,600 an ounce,” Marketwatch, February 26, 2013; “PRECIOUS-Gold steadies near $1,590 ahead of Fed testimony,” Reuters, February 26, 2013; “UBS is predicting a ‘major gold rally’ this year,” Marketwatch, February 25, 2013; “Gold rebounds; bullish bets fall to 4-year low,” Marketwatch, February 25, 2013; “Big Investors Differ on Gold's Prospects,” Wall Street Journal, February 25, 2013; “Gold Advances in New York on Purchases by Central Banks,” Bloomberg, February 25, 2013; “Russia, Kazakhstan Increase Bullion Reserves for Fourth Month,” Bloomberg, February 25, 2013; “Gold, Silver Creep Lower Amid Investor Trepidation,” Wall Street Journal, February 22, 2013; “PRECIOUS-Gold pares gains, stays on track for second weekly loss,” CNBC, February 22, 2013; “Gold ends at seven-month low, down 2.3% on week,” Marketwatch, February 22, 2013)

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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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