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Experts See Opportunity in Gold

Release Date: 
Saturday, October 20, 2012

American Advisor host Joe Battaglia provides a wrap-up of the week's precious metals news along with important commentary every week on the American Advisor Week in Review audio program. Click here to listen.

The price of gold consolidated this week on mixed economic news from the U.S., Europe and China. Gold was $33.80 lower for the week, settling at $1,721.50 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $1.41 lower, closing at $32.17 per ounce.

(Note: At last Friday’s Close, gold was $1,755.30 per ounce and silver was $33.58 per ounce.)

Gold saw downward pressure Monday on fears that China may not provide fiscal stimulus and the Federal Reserve may cease its current quantitative easing program sooner than expected. Data showed U.S. retail sales rose in September, suggesting stronger-than-expected economic growth in the third quarter. Last week, U.S. consumer sentiment unexpectedly hit a five-year high. "Basically the [gold] market is starting to take stock of better than feared data flow coming out over the weekend,” said Danske Bank analyst Christin Tuxen.

Chinese inflation was flat in September while exports rebounded at nearly twice the rate expected, lowering expectations for stimulus measures. The improved export data “might mean there’s less chance of stimulus or the size of the stimulus might be a bit less,” said Alexandra Knight, an analyst at National Australia Bank Ltd. “Precious metals have benefitted a lot from speculation about increased stimulus over the last few weeks.”

“Muted inflation pressure will provide more room for the government to introduce additional policy easing or stimulus measures,” said Lu Ting, chief China economist at Bank of America Corp. in Hong Kong. Yi Gang, a deputy governor of the central bank, said the nation has “relatively large room” for use of monetary and fiscal policies compared with some countries.

Hedge funds and large speculators increased their gold positions for the second consecutive week last week, with net-long positions at 16-month highs, according to data from the Commodity Futures Trading Commission.

“As the fundamentals behind higher gold have not changed, it is reasonable to assume that the prices should edge up higher despite periods of consolidation,” said David Levenstein, an independent expert and career metals trader. “I think these dips should be used to accumulate more of the physical metal.” Levenstein commented, “for weeks I have targeted $1800 an ounce level for gold prices….the next move will breach this key level of resistance and test $1825/oz. ounce then $1850/oz.”

Although investors generally consider September to be among the best months for gold and silver prices, November has proven to be the winner over the past ten years, according to a report published this by CIBC World Markets. “Investors could capture 56% of the annual gold gains and a whopping 66% of the annual silver gains by holding the metals over the period November to February,” the firm noted.

CIBC World Markets raised its precious metals forecasts for 2014, citing “strong demand coming from both investor interest and central bank buying.” Gold may average $2,200 per ounce and silver $38 per ounce in 2014, the firm said. For next year, CIBC reiterated its g estimates of $2,000 per ounce gold and $35 per ounce silver.

“Furthermore, with the effects of QE1 and QE2 boosting gold prices at a rate of $20-$30 per month, we expect QE3 will have similar influences on the gold price, although likely at the lower end of this range,” CIBC analysts said.

HSBC analyst James Steel said the price of gold is expected to rise to $1,900 per ounce by the end of the year. HSBC also raised the bank’s 2013 average gold price target. "Although the first rush of QE3-inspired gold buying is over, we believe that the Fed's open-ended commitment to easing until U.S. labor markets improve will support gold well into 2013," Steel said.

“Gold prices are likely to finish the year with the same strong, upward momentum that was seen during the beginning of the year — only this time, prices will rise further and surpass the Comex settlement record high,” said Viktoria Palushaj, market analyst at investment firm CitrinGroup in Birmingham, Michigan.

"The overall attitude towards the yellow metal remains positive looking out over the months ahead, UBS analyst Edel Tully said, conceding the market’s recent “hesitancy to express that view in the near term.”

Cary Pinkowski, chief executive officer of Astur Gold Corp., said “the machinery of democracy ensures that the global economy will continue to be flooded with ‘new’ money — driving up the price of hard assets, particularly gold.”

BMO Capital Markets raised its 2013 price targets for gold and silver by 14.7% and 11.4%, respectively. The gold price may rise to average $1,950 per ounce in 2013 and top $2,000 per ounce within the next year. The firm expects that silver may average $39 per ounce in 2013. The European Central Bank’s intentions to purchase sovereign debt and quantitative easing by the Federal Reserve suggest “continued negative real interest rates and appeal for precious metals as a store of value,” the Toronto-based firm said.

John Reade, senior vice president at hedge fund PaulsonandCo., said “I think gold has an appropriate place in a portfolio during certain macroeconomic circumstances and I think that’s right now. Under the right macroeconomic circumstances, gold is a good place to be and those circumstances will continue to play out over the next few years.”

“There is no doubt the expectation or the announcement of QE3 or QE infinitive has been positive for gold and I would expect gold will do well in this environment where central banks will continue to print and where monetary policy is still in an extraordinary condition,” Reade said. ‘‘We are in a low-growth environment with high U.S. unemployment for the next few years. I can’t see any way monetary policy can be normalized quickly.’’

“In the immediate future it’s hard to know if the current gold price is the ‘right’ one”, said Bill Gross, the founder and co-chief investment officer of Pimco, which manages the world’s biggest bond fund. noted, “But, given the negative real interest rates you get for holding the dollar, gold is the favored alternative…. For those investors who are looking to protect themselves from inflation, then, gold is a serious hedge.”

Dawn Bennett, portfolio manager of the Bennett Group of Funds, believes that gold’s increase from the $1,500 level is not purely a response to the U.S. Federal Reserve’s third round of quantitative easing. Gold’s “return to near $1,800 is a sign that some rationality has returned to the market,” she said. “We view the broader picture as the reason to invest in gold,” Bennett noted. “In 2013, the developed world is going to have to deal with its massive debt problems and policies that have spent the last few years devaluing local currencies,” she said. “As this happens, gold will be one of few havens available to investors looking to protect their wealth.”

Analysts are noting a rise in demand for physical gold in India with the festival season that is now underway and set to peak next month. Bullion and jewelry demand for both gold and silver "is good in India this week," Chintan Karnani, a director at Insignia Consultants, said in a report.
HSBC said that gold could resume its upward trend on buying from India. “We see bullion demand as likely to improve ahead of Diwali, a festive gold-buying period,” they said, adding that further strength in the Indian rupee would also help to support demand for gold from India.

Commerzbank commodity strategists said that following a recent price drop, “physical buying interest in Asia ahead of the festival season in India can be expected to pick up, thereby stabilizing prices.” Monetary policy and supply issues could prove supportive for gold, the analysts suggested. “Ultra-expansionary monetary policy pursued by central banks suggests that the gold price will rise again in the near future, as do the ongoing strikes in the South African gold mines,” they said. The strikes are affecting half of the gold production of the fifth-largest gold producing nation, the analysts noted.

Sources: “PRECIOUS-Gold dips as stocks fall, heads for second weekly loss,” Reuters, October 19, 2012; “Paulson’s Reade Says Loose Monetary Policy May Boost Gold Price,” Bloomberg, October 18, 2012; “Bill Gross: buy gold, bonds are in a bubble,” Moneyweek, October 18, 2012; “PRECIOUS METALS: Gold Rangebound in Asia; Physical Demand Helps,” Wall Street Journal, October 18, 2012; “PRECIOUS-Gold softens in line with euro ahead of EU summit,” Reuters, October 18, 2012; “Gold futures slip after China GDP data,” Marketwatch, October 18, 2012; “Gold Declines First Time in Three Days Before EU Summit,” Bloomberg, October 18, 2012; “Gold price dips should be a cause for buying, not concern – Levenstein,” Mineweb, October 18, 2012; “PRECIOUS METALS: Comex Gold Edges Higher on Euro Rally,” Wall Street Journal, October 17, 2012; “PRECIOUS-Gold firms with euro as Moody's affirms Spain rating,” Reuters, October 17, 2012; “Gold pares gains after strong U.S. data,” Marketwatch, October 17, 2012; “Gold Advances a Second Day as Dollar Drops Before Summit,” Bloomberg, October 17, 2012; “BMO Capital raises 2013 Gold, Silver price forecasts,” Commodity Online, October 16, 2012; “PRECIOUS-Gold lifts from 1-month low as euro, stocks rise,” Reuters, October 16, 2012; “Gold drops over $20, marks second-session loss,” Marketwatch, October 15, 2012; “China Inflation Cools Amid Signs of Stable Economy Growth,” Bloomberg, October 15, 2012; “Gold Drops to Two-Week Low on Signs China’s Economy Stabilizing,” Bloomberg, October 15, 2012; “PRECIOUS-Gold falls 1 pct as U.S. data erodes stimulus hopes,” Reuters, October 15, 2012; “Hedge funds pile into gold, gas for second week,” CNBC, October 14, 2012; “China’s Economy Shows Signs of Stabilizing as Exports Gain,” Bloomberg, October 14, 2012; “Gold’s primed for a breakout, but where to?”, Marketwatch, October 12, 2012; “Physical gold and silver needed to weather the coming financial tsunami - Levenstein,” Mineweb, October 11, 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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