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European Debt and U.S. Economy May Prompt Fed Move

Release Date: 
Wednesday, May 30, 2012

Gold recovered from an early morning slide but precious metals prices remained volatile as worries over Spain's debt persist. Gold was up $8.20 as of 9:41 a.m. Pacific Time on the New York Spot Market, trading at $1,564.00 per ounce, while spot silver was $0.04 higher, trading at $28.02 per ounce. (Click here for the most current spot prices.)

The euro reached a new 23-month low versus the dollar while Italian borrowing costs soared above 6 percent. Spain plans to raise new funds to recapitalize nationalized lender Bankia, even as the country's borrowing costs are near euro-era highs.

Jeb Handwerger, editor of GoldStockTrades.com, commented "Bankeo, one of the largest Spanish banks, has had a run on it. The government is stepping in to nationalize it. Fear is rising throughout Europe that Greece will exit the euro and there may be potential consequences that there may be some failures of major European banks. We're seeing a rapid devaluation of the euro where we could be potentially testing the 2010 lows when the Fed came riding in to the rescue and announced QE2. The only way out of this crisis is that the ECB and the Fed will have to print more money, which is going to be very bullish for precious metals."

"No commodity can stand up against a stronger USD in the short-run," Walter de Wet, head of commodity strategy with Standard Bank, said in a note to clients. "However, over a longer period of time commodity prices adjust despite the level of the USD—this is clear if you look at the value of gold over the past decade," he added.

U.S. economic growth figures for the first quarter are due on Thursday and monthly employment data is due on Friday. These figures will be closely watched by investors since they may influence the Fed's decision on quantitative easing at its June meeting.

"This month we expect some announcement by the Fed to institute an additional accommodative move before the 2012 U.S. election," Handwerger said. "Their other time would be August, which would be very close to the election, so this would be the most strategic time for the ECB and the Fed to make a stand. Gold and silver have been forming a long base, holding and bouncing off critical support levels, so an upward move is expected this summer earlier rather than later. Remember, in 2008, we saw a correction in precious metals and mine shares only to be followed by an extremely powerful rally into new highs. We expect history may not repeat, but it certainly can mimic that move."

(Source: "Gold Falls on Weaker Euro, Spain Fears," Wall Street Journal, May 30, 2012; "PRECIOUS-Gold retreats as euro surrenders early gains," Reuters, May 29, 2012; "Gold futures extend losses, dip below $1,540," MarketWatch, May 30, 2012; "Early Fed Move Will Boost Gold," The Street, May 29, 2012)

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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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