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Easing Expected - Analysts Discuss Gold’s Role as an Inflation Hedge

Release Date: 
Thursday, March 7, 2013

Gold fell after the European Central Bank (ECB) stated no further steps would be taken to bolster the ailing euro zone economies.  The yellow metal was $7.20 lower at 9:06 a.m. Pacific Time on the New York Spot Market, at $1,578.30 per ounce.  Spot silver was $0.22 lower at $28.92 per ounce.  (Click here for the most current spot prices.)

ECB President Mario Draghi said the central bank sees Europe’s economy picking up in late 2013, but revised growth projections downward for the year.  

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.”

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.”

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.

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.”

(Sources:  “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)

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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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