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Central Banks Add to Gold Reserves

Release Date: 
Friday, May 31, 2013

Gold prices rose above the important psychological $1400 level Thursday on the New York Spot Market before ultimately closing for the week at $1389.30, up $2.00 from last week. Silver prices remained range bound again this week and closed at $22.37, down $0.12 for the week.

Central Banks Continue to Add to Gold Reserves

Russia, Turkey, Kazakhstan, Belarus, Azerbaijan, and Greece added to their gold reserves in April. “We expect the trend of central bank buying to continue, especially in the emerging economies,” said an economist at National Australia Bank Ltd. “While expectations are for lower prices at the end of the year, physical demand, especially in Asia, has been very supportive.” (“Gold Advances as Central Bank Purchases Counter Decline in ETPs,” Bloomberg, 5/27/13.)

Gold and Silver Forming a Bottom

Three analysts were polled by Barron’s on whether gold prices have hit bottom. Two of the analysts remained bullish on gold while a third believes gold continues to be under pressure. Simon Mikhailovich, Manager for Tocqueville Bullion Reserve, said, “If systemic risk has abated and global recovery is well underway without inflation, then the need for gold as insurance will continue to decline and prices will keep falling. If that is incorrect, as I believe, then short-term volatility isn't indicative of future direction. Very few larger Western investors own gold or see the need to own it now. If systemic risk rises, which I think it will, demand for gold has the potential to overwhelm supply and prices have a long way to go.”

Bob Hoye, Editor and Chief Investment Strategist for Institutional Advisors, believes that gold is “exceptionally oversold [based] on our proprietary technical models…” and recommended that investors buy in May. (“They Said What? Gold Prices,” Barron’s, 5/25/13.)

Record Gold Demand

The World Gold Council’s Managing Director reports record gold demand in Asia for the second quarter. “Asian markets will see record quarterly totals of gold demand in the second quarter of 2013… Even if ETF outflows continue in the United States, it is quite likely that the gold previously held in ETFs will find a ready market among Indian, Chinese and Middle Eastern consumers who are taking a long-term view on the prospects for gold.” India alone saw a 200% increase in gold imports from the year before. (“Asia gold demand to hit quarterly record, absorb ETF outflow-WGC,” Reuters, 5/29/13.)

Fed Still Accommodative, But Is It Too Much?

Federal Reserve Bank of Boston President Eric Rosengren said the Fed should press on with record stimulus to speed economic growth, reduce 7.5 percent unemployment and boost inflation running below 2 percent.  While the labor market has improved, “significant accommodation remains appropriate at this time,” Rosengren said today in a speech in Minneapolis. “If the incoming economic data do not reflect improvements consistent with both elements of our dual mandate, I believe the Fed should be willing to increase asset purchases,” he said, referring to the central bank’s goal to achieve stable prices and full employment.  The Boston Fed chief is among policy makers warning that inflation -- which slowed to 1 percent in March as measured by the personal consumption expenditures index -- could impair growth should it decline further. (“Rosengren Says Significant Fed Accommodation Still Needed,” Bloomberg, 5/29/13.)

The Federal Reserve has been asked to "do too much" to heal the U.S. economy and "will inevitably fall short," former Fed Chairman Paul Volcker cautioned Wednesday. Speaking before the Economic Club of New York, Volcker said the Fed's independence and credibility are at stake, as the central bank engages in unprecedented stimulus efforts. The Fed is being asked to "accommodate misguided fiscal policies" and "deal with structural imbalances" while simultaneously balancing low inflation with stronger economic growth, he said.

"Credibility is an enormous asset," he said. "Once earned, it must not be frittered away by yielding to the notion that a 'little inflation right now' is a good thing to release the animal spirits and pep up investment.” Inflation, once it starts, "is hard to control and reverse," and all too often, the Fed is too late to act, he added. (“Volcker:  Fed will ‘fall short’,” CNN Money, 5/29/13)

Weak U.S. Economic Data

U.S. gross domestic product expanded at a 2.4 percent annualized rate in the first quarter, the Commerce Department said today. The median forecast in a Bloomberg survey called for no revision from the 2.5 percent pace initially reported. Initial jobless claims rose 10,000 to 354,000, above the 340,000 forecast. The dollar fell for a second day against a basket of currencies.

“Today’s data is an indication that the economy has not fully recovered, and so the Fed will not end its stimulus in a hurry,” Phil Streible, a senior commodity broker at R.J. O’Brien & Associates in Chicago, said in a telephone interview. “Also, a weaker dollar helps.” (“Gold Futures Advance on Speculation Fed Will Maintain Stimulus,” Bloomberg, 5/30/13)

Gold and Silver Forecasts

Bank of America/Merrill Lynch told investors that, despite its downward revision of gold’s 2013 price target, the gold rally is expected to continue. “In our view, the gold bull market is pausing. However, we believe the structural rally is not broken, and we see several scenarios that could push prices higher again. To pick just one, more affluent emerging markets could increase metal purchases to an extent that gold could trade at $2,000/oz [by 2016], even if investors bought only a third of the gold they purchased in 2012….” (“Bringing gold forecast in line with target,” Bank of America/Merrill Lynch Global Metals Weekly, 5/28/13.)

Gold may rise $100 to $1500 per ounce to cover short positions, TD Securities wrote. The investment dealer also disputed reports that the Federal Reserve may reduce its quantitative easing program. “The U.S. central bank cannot allow yields to rise any further if it is serious about stimulating the economy…”  (“$1,500 Gold Target Still Possible To Reach – TDS,” Kitco News, 5/29/13.)

Silver’s “bullish reversal” last week suggests silver may rally to $25 per ounce, according to a technical analyst with Commerzbank AG. The reversal, coupled with a divergence between the daily price and the “relative strength index” “ leads us to believe that another up leg should be made in the near future” toward $25. (“Silver Seen Rallying to $25 After Plunge: Technical Analysis,” Bloomberg, 5/29/13.)

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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