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Fed Affirms Commitment to Monetary Easing

Release Date: 
Saturday, October 27, 2012

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The price of gold saw support this week following release of the September FOMC minutes affirming the Fed’s commitment to quantitative easing and low interest rates in an effort to stimulate the economy. Earlier in the week, gold followed the euro lower after Moody’s Investors Services downgraded five Spanish regions, boosting the U.S. Dollar Index to a one-week high. Gold was $5.50 lower for the week, settling at $1,716 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $0.50 lower, closing at $31.67 per ounce.

The Bank of Japan will hold a policy meeting Oct. 30 in which they will consider increasing its asset-purchase program by 10 trillion yen ($125 billion) to 90 trillion yen, a Japanese newspaper reported.

Commerzbank said "we envisage a renewed rally over the coming weeks, given the Fed’s ultra-expansionary monetary policies and the likely post-election problems in the U.S. with the looming fiscal cliff and the debt ceiling."

"The major thing to look out for is what central banks are doing," said Christin Tuxen, analyst with Danske Bank. "With interest rates set to be low over a period of time, gold is set to perform well in the near term," she commented.

Sterne Agee precious metals and mining analyst Michael Dudas has a gold price target of $2,000 per ounce in 2013 and believes investors have a buying opportunity now. “I think there will be some support in the physical market around $1,700. We’ll see some buying out of India. We think that central banks will continue to have a bid under this marketplace, and as long as the Fed will keep real interest rates low forever, it seems, I think gold it going to continue to get a bid in the marketplace. I think this pullback, from a fundamental basis to me, is more of a buying opportunity than a sell.”

Gold has the potential to break the all time high of $1,921 per ounce in December, according to Saxo Bank. “With the open ended nature of quantitative easing, part three, we see the potential for gold reaching the 2011 high at $1,921 per ounce during December following an initial period of consolidating as $1,800 offers strong resistance. Into 2013 the rally may eventually take us up and above the physiological barrier of $2,000 before reaching a technical target of $2,075,” the Danish investment bank said.

Deutsche Bank raised its 2013 price targets for gold and silver, citing support from stimulus measures by central banks including the Fed. Gold may average $2,113 per ounce in 2013 and exceed $2,200 per ounce, while silver may average $44 per ounce, the bank said. "While we have targeted gold prices moving above $2,000 per ounce since the beginning of 2011, we believe the Fed's open-ended program of QE announced last month increases our confidence that a surge in the gold price above this level is only a matter of time.”

Deutsche Bank said in a commodities report that after QE1 and QE2 were announced, gold prices rallied up to 15% higher for a period up to 50 trading days. If this scenario were to repeat with the current QE3, gold prices could rise to $1,900 per ounce by the end of October.

"We believe central bank action to stimulate growth, avoid deflation and reduce systemic risk is unambiguously bullish for the precious metals sector and specifically gold,” Deutsche Bank said. “A major support for precious metal prices are the recent moves by central banks to expand their balance sheet.”

UBS analyst Edel Tully said, “a dovish [Fed] comment which reiterates current views and the mid-2015 rate guidance would somewhat help precious metals sentiment.” She added, “We shouldn’t underestimate the deeper and broader held view that the current macro backdrop is gold positive.” She commented, "there are two stories at play here - a short-term case of frustrated investors, disappointed that gold hasn't rewarded them with a +$1,800 price tag, but against this is another player, with a more strategic view who is either 1) not willing to sell into current weakness and/or 2) using the pullback to add to length.”

“Ultimately higher gold prices are only a matter of time away,” Tully said. The market appears to be underestimating the benefits of QE3 on gold and the Fed's overall easing bias, particularly the potential for QE4 to replace 'Operation Twist' when the latter expires at the end of the year."

“The whole economic situation is going to get worse rather than better,” said Thorsten Polleit, chief economist at Degussa Goldhandel GmbH, a German precious metal trading and investment company. “Paper currencies have already lost their function as a store of value and it’s getting worse. People are increasingly putting their savings into precious metals.”

HSBC analyst James Steel wrote, “emerging-market demand for bullion has picked up, given the recent gold price decline, and this may act as a backstop against steeper price drops.” Steel also wrote, “[a] highly accommodative stance by the Federal Reserve ... is positive for gold prices in the medium term.”

Polymetal International Plc Chief Executive Officer Vitaly Nesis said he has a $2,000 per ounce target for gold over the next six months.

With the recent rise of the rupee, gold has become more affordable during the primary festival season in India. “The appreciation in the rupee has caused the gold price to correct from the record levels and this correction is seen as an opportunity by many to get into gold,” said Chirag Mehta, fund manager at Quantum Asset Management. “With the festival season and marriage season starting now, demand will gain further momentum.” Previously pent-up demand has picked up in the last 10 to 15 days and buying may be better this festival season than a year earlier, said Bachhraj Bamalwa, chairman of the All India GemsandJewelry Trade Federation.

The U.S. economy grew a better-than-expected 2% in the third quarter, Commerce Department data showed on Friday. “On the inflation side of things, there was a bit of a jump in the headline price index, up to 2.8% from 1.6% in the prior quarter,” wrote Dan Greenhaus, chief global strategist at BTIG LLC in New York. Gold is often considered a potential hedge against inflation.

(Sources: “Gold turns higher after U.S. GDP report,” Marketwatch, October 26, 2012; “Gold Traders More Bullish as ETP Hoard Sets Record: Commodities,” Bloomberg, October 26, 2012 “PRECIOUS-Gold bounces from 7 week low, eyes Bank of Japan,” Reuters, October 25, 2012; “Gold rises on Fed policy, dollar weakness,” Marketwatch, October 25, 2012; Reuters, October 24, 2012; “PRECIOUS-Gold holds near 7-week low; eyes on Fed meeting,” Reuters, October 24, 2012; “Top Analyst: Buy the Dip, Gold to $2,000,” CNBC, October 23, 2012; “Deutsche Bank still bullish on Gold; raises 2013 Gold, Silver forecasts,” Commodity Online, October 23, 2012; “Has QE3 fatigue set in to the gold market?,” Mineweb, October 23, 2012; “Gold Is Seen Rebounding Following Drop to a Six-Week Low,” Bloomberg, October 23, 2012; “Gold Falls as Strengthening Dollar Curbs Investor Demand,” Bloomberg, October 23, 2012; “Has QE3 fatigue set in to the gold market? ,” Mineweb, October 23, 2012; “Polymetal Sees Gold at $2000 Over Next 6 Months,” Bloomberg, October 22, 2012; “PRECIOUS-Gold hits 6-week low as equities weaken, dollar firms,” Reuters, October 23, 2012; Physical Demand for Gold Fueling Spike,” Bloomberg, October 22, 2012; “PRECIOUS-Gold rebounds as stocks recover, dollar retreats,” Reuters, October 22, 2012; “You can see $1,900 Gold by October end, if QE history repeats: Deutsche Bank,” Commodity Online, October 20, 2012; “Gold Imports by India Seen Climbing First Time in Six Quarters,” Bloomberg, October 19, 2012; “PRECIOUS-Gold tracks equities lower, heads for 2nd weekly fall,” Reuters, October 19, 2012; “PRECIOUS METALS: Gold Falls a Tad in Asia; Weaker Equities Weigh,” Wall Street Journal, October 19, 2012; “’Gold has potential to break all time high during December,’ Commodity Online, October 15, 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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