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Central Bank Policies Support Gold

Release Date: 
Friday, May 3, 2013

Gold and Silver Prices:

Gold prices remained firmly above $1400 on the New York Spot Market though prices moved slightly lower from last week’s close after positive job figures were released on Friday. Silver was modestly higher for the week. Gold ended the week at $1471.70, up $7.80. Silver closed at $24.23, up $0.09 for the week.

Analysts: Gold “Real Money;” Central Bank Policies Support Gold

Analysts continued to discuss gold’s future as the yellow metal recovered from its earlier lows. Elliott Management Corp., a $21.8 billion hedge fund, told investors that gold is “the best store of value” in an uncertain global economy despite its recent losses. “Although our gold position lost money in the quarter and afterward, we remain unconvinced that anything resembling a genuine normalization of global economic and financial conditions has been achieved…There is only one store of value and medium of exchange that has stood the test of time as ‘real money’: gold. We expect this dynamic to assert itself in a large way at some point.”  (“Elliott Tells Clients Money-Losing Gold Still Best Value,” Bloomberg, 5/2/13.)

"I don't believe the fundamental reason of owning gold has changed one iota," said the portfolio manager for the $15 billion Permanent Portfolio fund. "You still have negative short-term real interest rates, and easy monetary policies around the world with liquidity being created…" (“Gold falls more than 1 pct as commodities dip,” Reuters, 5/1/13.)

Stating gold's fundamentals are “intact,” the Senior Managing Director for Tangent Capital told CNBC, “the trend is higher from here… The problem is when central banks fear deflation more than anything, they try everything to defeat it, so, you know, currency wars, money printing, zero-interest-rate policy, forward guidance, twist…They do everything they can. When they can't win the battle against deflation, they devalue the currency against gold ‘cause gold’s the only thing that can't fight back.” If the Federal Reserve's quantitative easing wins, gold will go higher. "If deflation prevails … they'll wake up one day and say gold's $4,000 an ounce, we're a buyer at $3,995…” (“Gold at $4,000 an Ounce?” CNBC, 5/2/13.)

TD Securities’ Bart Melek believes the momentum which led to gold’s selloff may be reversing: “A string of poor U.S. economic data, which now totals eight out nine key indicators and includes a substantial miss on the Q1-2013 U.S. GDP, has many market participants believing that the market momentum that drove capital out of gold may be reversing…Markets are pricing in a more distant end of the QE (quantitative-easing) program, as they believe the Fed will maintain its aggressive bond purchase to bolster the U.S. economy, which has driven down the opportunity cost of holding zero-yielding assets like gold relative to Treasury yields…TD Securities expects gold to trend toward a $1,550/oz average in Q3, as the dynamics of rising yields, a stronger greenback and very bullish equity market momentum should start abating and be more conducive to capital flowing back into gold exposure again." (“TD Securities: Gold Rebounding On Series Of Misses In U.S. Economic Data ,” Kitco News, 4/30/13.)

Federal Reserve Remains Committed to Quantitative Easing

Following its Federal Open Market Committee, the Federal Reserve affirmed its commitment to quantitative easing. “The central bank pointed to a high unemployment rate and low inflation as key reasons why it will continue buying $85 billion a month in mortgage-backed securities and Treasuries. That policy, known as quantitative easing, has already injected $2.5 trillion into the economy since December 2008…The Fed said it stands ready to either ‘increase or reduce the pace’ of those purchases in response to economic activity… The Fed also reiterated its plan to keep its key short-term interest rate near zero until the unemployment rate falls to 6.5% or inflation exceeds 2.5% a year. (“Federal Reserve sticks with stimulus,” Fortune, 5/1/13.)

“The continuing pace of asset purchases of $85 billion a month will go on until the labor market improves dramatically,” said a futures specialist with Citi Institutional Client Group. “So in the broadest picture, I would see that (statement) as bullish for gold…” A senior market analyst with Price Futures Group agreed. “I think it’s is supportive for gold…I actually had clients buy after the statement.” (“Gold Bounces After FOMC Statement; Continued Accommodation Seen As Supportive,” Forbes, 5/1/13.)

U.S. Economy May Face “Spring Economic Swoon”; Global Economies Struggle

“Evidence of another spring economic swoon and fewer people being hired continues to pile up. A pair of reports released Wednesday showed growth among U.S. manufacturers fell in April to the slowest pace since late last year. And a closely followed employment survey indicated that companies added the fewest number of new workers in seven months. These data suggest that we are going through another spring-summer economic slowdown like we have in the past three years,” said an economist at Wells Fargo.” (“U.S. economy enters another spring swoon,” MarketWatch, 5/1/13.)

The eurozone’s recession is projected to last through 2013, according to the EU which projects eurozone economies will contract by 0.4% this year. Earlier this week, the European Central Bank (ECB) cut interests to a record low 0.50%. “Indications that the eurozone’s economy is getting no better could force the European Central Bank into further action.” (“EU predicts eurozone recession to continue in 2013, key economies set to breach deficit limits,” The Washington Post, 5/3/13.)

China reported that its Gross Domestic Product grew at a slower pace than projected in the first quarter of this year. “‘While activity in the euro-zone has continued to contract, it is hardly expanding in China either.’ The prospect of a twin slowdown in the US and China is particularly troubling as growth in both regions is required to help offset the recession in the Eurozone. The worries over how the US economy will perform in the second half of the year were further deepened after separate reports yesterday showed a fall in construction spending and employment growth easing.” (“Twin slowdown in China and US feeds global fear,” The Telegraph, 5/1/13.)

Dealers Continue to Report Strong Physical Demand For Gold

MarketWatch wrote, “Bullion dealers have characterized the demand for the physical form of the precious metal as the strongest since the immediate aftermath of the Lehman Brothers collapse in 2008 and, in some cases, the strongest on record.” (“What bullion dealers are saying about gold demand,” MarketWatch, 5/3/13.)

British dealer Physical Gold reported gold shortages and delayed delivery due to higher demand for physical gold. “Clients who have been ready to pounce have now bought as they realize they are getting good value and the environment for gold is still strong. There are still few decent alternatives to gold as a safe haven asset.” (“Gold buyers forced to go on waiting list,” The Telegraph, 4/30/13.)

In Australia, buyers were waiting in lines stretching 1/3 of a mile to purchase gold coins while jewelry shops in India and China exhausted their supplies in a single day, according to the managing director of investments at the World Gold Council. World demand has pushed physical premiums to 30 year highs reported MKS (Switzerland) SA. The U.S. Mint sales rose to their highest level since December 2009. (“U.S. Mint Sales of Gold Coins Jump to Highest in Three Years,” Bloomberg, 5/1/13.)

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

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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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