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Citi Sees Gold Higher On Europe and China Support

Release Date: 
Monday, October 24, 2011

Gold prices rose more than 1 percent in morning trading as European leaders moved towards defining a plan to resolve the euro zone debt crisis and China's economy showed signs of continuing its rapid growth.

The European Union summit in Brussels over the weekend yielded an agreement on bank recapitalization and strategies for leveraging the zone’s rescue fund to halt bond market contagion. Final decisions were deferred until a second summit scheduled for Wednesday as differences remain over the extent of losses to be borne by banks holding Greek debt.

The region continues to struggle economically with business surveys on Monday suggesting that the euro zone’s struggling private sector is in danger of tipping into recession.

"Gold popped up this morning along with most of the commodities markets. The beginning of the EU debt resolution has had a strengthening effect on commodities and equities as a whole," Credit Suisse analyst Tom Kendall said. Economist Intelligence Unit (EIU) economist Caroline Bain said "we believe that gold will outperform the industrial commodities over the six months as uncertainty will persist."

Citigroup now expects gold prices to average at $1,950 a troy ounce in 2012. "Increased global risk, U.S. dollar weakness, growing inflationary fears, the U.S. debt downgrade and continuing sovereign debt risks in Europe have increased investor appetite for gold," Citi's Jon H. Bergtheil said in a research note.

"This has been supported by central banks reversing activities from being sellers for most of the past 15 years to net buyers more recently and is supported by the Fed's stated desire to keep interest rates at super-low levels in the medium term," Bergtheil said. Federal Reserve Vice Chairman Janet Yellen said on Oct. 21 that a third round of large-scale securities purchases may become warranted to boost the U.S. economy.

China's manufacturing sector picked up moderately in October, ending a three-month contraction. "The China PMI [Purchasing Manager’s Index] got the market fired up, with a lot of shorts covering as the data suggested that the slowdown in China may have peaked," said David Thurtell, a Citigroup analyst. China has seen rapid growth and inflation that has helped to spur gold demand in the country.

Suki Cooper, an analyst at Barclays Capital in New York, wrote "we continue to expect gold prices to be cushioned amid the seasonally strong period for demand, and this remains key before investment demand returns to the driver’s seat. We retain our positive view on gold, given the macro backdrop."

(Sources: "Citi raises gold, silver forecasts for 2012, 2013,"MarketWatch, October 24, 2011; "Gold rises 1 percent on Europe prospects, China data,"Reuters, October 24, 2011; "Gold Climbs for Second Day as European Debt-Crisis Concern Stokes Demand," Bloomberg, October 24, 2011)

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