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Central Banks Favor Easy Monetary Policies

Release Date: 
Saturday, March 9, 2013

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Gold traded in a narrow range for most of this week. Gold was $2.40 higher this week, settling at $1,580.20 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $0.42 higher, closing at $29.10 per ounce.

On Friday, gold fell in early trading on improved U.S. job growth and unemployment data but later recovered some of its losses as bargain hunters bought on the dip. The U.S. economy added 236,000 jobs in February as the unemployment rate fell to 7.7%, its lowest since Dec. 2008. Economists had expected the number of new jobs to rise by 160,000 and for the jobless rate to remain at 7.9%.

Federal Reserve Vice Chairman Janet Yellen said the Fed should continue with its $85 billion monthly bond purchase program. “At present, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment,” Ms. Yellen said in a speech to the National Association for Business Economics. Ms. Yellen is seen as a possible successor to Fed Chair Bernanke if he steps down when his second-term ends in January 2014.

Fed Chairman Bernanke also commented on the Fed’s current policy, favoring an accommodative stance. “A premature removal of accommodation could, by slowing the economy, perversely serve to extend the period of low long-term rates,” Mr. Bernanke said in a speech to a Fed research conference.

Haruhiko Kuroda, who is nominated to be the Bank of Japan’s governor, said he would take all necessary steps to end Japan’s 15 years of deflation.

"The Fed and its monetary policy actions are still the biggest issue day-to-day in the gold market, but you can see more discussion also about the possibility of looser monetary policy in Japan, or within Europe, or elsewhere," Mitsui Precious Metals analyst David Jollie said. "There's more of a realization that economic growth is not yet at a level that any country is happy with, and that therefore we could see further easing.”

Strong U.S. economic data, a recovering Chinese economy and quiet in the euro zone were among the drivers of gold’s fall last month, said Jan Skoyles, head of research at The Real Asset Co.
However, “it is these same factors which are now providing support to the gold price: unrest in Italy’s political world, further bailout talks in Greece, the sequestration [automatic budget cuts] in the U.S. and weaker-than-expected data from China’s services industry have now reminded investors that this crisis still has a long way to run,” she said. “I suspect many know that no matter the number on the U.S.’s employment figures on Friday, it will not be enough for the [Federal Reserve] and so we can expect QE to continue…”

The Federal Reserve’s Beige Book data released late Wednesday indicated that government fiscal and health care policies are holding back private spending and hiring. The data was expected to show that the economy was sluggish in early 2013. Metals analysts at HSBC suggest this may extend the Fed’s current easy monetary policies.

“The Federal Open Market Committee (FOMC), earlier in the year, said that substantial improvements in the labor market would be necessary to either slow or stop the quantitative easing (QE) program,” HSBC analysts said. “The bullion market may interpret the Beige Book’s report of the economy growing at a ‘modest to moderate pace’ as insufficient evidence for the Fed to stop QE, in our view. This is positive for bullion prices, as bullion had declined recently on concerns that the Fed may rein in QE.”

Jeff Gundlach, CEO and chief investment officer of Doubleline Capital and manager of the DoubleLine Total Return Bond Fund, said he does not know when quantitative easing will end, but it will not be any time soon. The four major central banks around the world -- the Bank of Japan, the U.S. Federal Reserve, the Bank of England and the European Central Bank -- all firmly support quantitative easing, expanding their balance sheets at an average rate of 3.5% per year. He expects the Fed to continue to expand its balance sheet for years. "It's not slowing down anytime soon," Mr. Gundlach said. Gundlach suggested current lower prices would be a "reasonably good entry point for gold.”

“We are going through a very slow period and it is a situation where we need central banks to step up," said Jeremy Friesen, commodity strategist at Societe Generale in Hong Kong. "If they do, it will be good for gold.”

“It seems as if accommodative monetary policies are here to stay for some time,” said Lance Roberts, CEO of Streettalk Advisors LLC.

Philip Silverman, managing director at Kingsview Management in New York, said there is no sign that central banks will stop printing money soon providing key support for gold prices as investors acquire gold as a hedge against inflation. “When you see central bankers acquiring gold, you kind of take it like this: You don’t fight in the stock market when the Fed is easing, so you wouldn’t want to fight the central banks when they’re buying gold, because they have deep pockets,” Mr. Silverman said.

The World Gold Council expects central banks to remain strong buyers this year after increasing purchases in 2012 by the most in almost five decades. Russia’s Bank Rossi, one of the largest gold buyers, increased its reserves for a fourth straight month in January.

The Bank of Korea added 20 tons of gold to its reserves in February, an increase of 24 percent. “The Bank of Korea’s gold buying is part of the long-term diversification of currencies and assets in foreign-exchange reserves,” the South Korean bank said in the statement. “It is of no great importance to try to gauge if it’s profitable or not based on short-term price swings.” David Lennox, a resource analyst at Fat Prophets, said “central banks really don’t worry too much about the gold price…What they are more concerned about is making sure that they get a good balance in their reserve portfolios.”

Azerbaijan acquired gold bullion for the first time in more than three years in January. A state official acknowledged regular purchases of gold since February 2012 as the nation acquired its current 15 tons of holdings. Azerbaijan plans to have gold reserves of up to 30 tons by the end of this year.

Investors in India and China, the world's two largest gold consuming nations, are buying gold after prices fell over recent weeks, a UOB KayHian senior analyst said. Recent record gold exports to China from Hong Kong pointed to robust physical demand for the metal, she said. Hong Kong's net gold exports to mainland China rose 47% in 2012.

Billionaire John Paulson's recently defended his positions in gold in a letter to clients. “Despite the volatility and drawdown of our gold equity positions, we believe in the long-term outlook for these positions as quantitative easing programs continue around the world, credit expands in the United States and gold equities continue to trade at a significant discount” to historical average valuations, the hedge fund said in a letter to investors. Paulson told clients in 2012 his Gold Fund would beat his other strategies over five years because the metal was the best hedge against inflation and currency debasement as countries pump money into their economies.

Philip Silverman at Kingsview Management agrees with Paulson on the longer-term outlook for gold but discusses some of the shorter term market pressure on hedge funds investing in the yellow metal given recent price moves. “A lot of hedge funds have been burnt by holding gold in an environment where equities are going through the roof. At the same time, a lot of commodity trading advisors were getting out of gold and then going short. The selling is much more of a reaction to what’s going on with gold right now. If you take a long-term horizon, it’s a good time to add gold.”

Regardless of gold’s recent price volatility, private investors continue to own gold. "The most recent price action has not caused increased investor concern," says Jeff Marshall, managing director of research sat Convergent Wealth Advisors in Washington. Convergent's clients typically keep about 2% to 4% of their money in gold and the firm hasn't recommended changing the allocation recently. "We expect that we'll have a position in gold for some time,” he noted.

Eugen Weinberg, head of Commodities research at Commerzbank, said "gold as inflation protection should get more demand from investors in the second half of the year.”

Analysts and traders said gold could attract buyers with Washington’s failure to avoid automatic sequester cuts. The cuts "will certainly worry the broader market and could limit the downside in gold," VTB Capital analyst Andrey Kryuchenkov said in a note.

(Sources: “Gold drops after jobs data blow out forecasts,” Marketwatch, March 8, 2013; “Paulson Gold Fund Down 18% as Metal’s Slump Foils Rebound,” Bloomberg, March 7, 2013; “Why you shouldn’t be selling gold,” Marketwatch, March 7, 2013; “Gold pares some gains as ECB holds pat,” Marketwatch, March 7, 2013; “PRECIOUS-Gold prices edge down as investors prefer riskier bets,” Reuters, March 7, 2013; “Gundlach on Why Quantitative Easing Will End Badly,” The Street, March 6, 2013; “Azerbaijan to increase gold reserves,” Mineweb, March 6, 2013; “Korea Joins Russia, Kazakhstan in Boosting Gold Holdings,” Bloomberg, March 6, 2013; “Gold Futures Gain for Third Straight Day on Stimulus,” Bloomberg, March 6, 2013; “PRECIOUS-Gold snaps 4-day decline on expectations of easy money,” Reuters, March 5, 2013; “Gold Higher in Asia on Physical Demand; Precious Metals Higher,” Wall Street Journal, March 4, 2013; “PRECIOUS-Gold snaps 4-day fall on prospects of further easing,” Reuters, March 5, 2013; “PRECIOUS-Gold snaps 4-day decline on expectations of easy money,” Reuters, March 5, 2013; “Gold: Why Some Investors Are Still Hanging On,” Wall Street Journal, March 5, 2013; “Comex Gold Gains 10 Cents in Quiet Trade After Seven-Month Low,” Wall Street Journal, March 4, 2013; “Gold up; analysts say investor fatigue has set in,” Wall Street Journal, March 1, 2013; “Fed’s Yellen: Full steam ahead on QE3,” Marketwatch, March 4, 2013; “Gold prices find footing after 3-session drop,” Marketwatch, March 4, 2013; “Gold Advances on Japan, U.S. Outlook for More Stimulus, Bloomberg, March 4, 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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