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Factory Report Ignites Fed Easing Speculation

Release Date: 
Friday, May 18, 2012

The price of gold rose today, extending a late-week rally with support from a lower dollar and concerns over U.S. economic growth. Gold was up $14.20 at 11:52 a.m. Pacific Time on the New York Spot Market, trading at $1,589.50 per ounce. Spot silver was up $0.58, trading at $28.73 per ounce. (Click here for the most current spot prices.)

A disappointing manufacturing report for the mid-Atlantic region increased speculation the Federal Reserve may provide a new round of fiscal stimulus. The report showed factory activity unexpectedly shrinking in May, the region's first downturn in eight months. Recent Fed meeting minutes indicate policymakers are ready to act if conditions worsen. "With the prospect that growth may ease in the short-term, concerns of further quantitative easing may be gold-positive," said HSBC analyst James Steel in a note.

Following gold's $34 increase on Thursday, UBS wrote: "Yesterday, gold defied a stronger dollar, weaker equities, and another raft of negative EU headlines (to rise). It felt like the gold market of yesteryears..." George Gero, a precious metals strategist with RBC Capital Markets, echoed this view: "The resilient [gold] market once again proved that major selling brings bargain hunting..." 

Okayama Metal & Machinery became the first Japanese pension fund to publicly announce its addition of gold to the fund. Chief Investment Officer Yoshisuke Kiguchi said he was diversifying into gold to "escape sovereign risk." The CIO said that "from a very long-term point of view, gold may be one of the safe currencies."

Takahiro Morita, head of the Tokyo arm of the World Gold Council, said that fund managers are increasingly receptive to the idea that gold could act as a buffer against shocks. "Last year's tsunami and the eurozone debt crisis shows that it was wise to expect the unexpected," he said.

(Source: "PRECIOUS-Gold rises 1 pct, eyes weekly gain, as euro recovers," Reuters, May 18, 2012; "Gold Climbs A Second Day As Europe Concern Boosts Demand," Bloomberg, May 18, 2012; "PRECIOUS METALS: Gold Rises For Second Day As Dollar Rally Cools," Wall Street Journal, May 18, 2012; "Japanese Pension Fund Switches to Gold," Financial Times, May 17, 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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