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Fed and ECB Delay Quantitative Easing; Central Banks Continue to Buy Gold

Release Date: 
Thursday, August 2, 2012

The Federal Reserve and European Central Bank (ECB) failed to announce stimulus measures at their meetings on Wednesday and Thursday, disappointing financial markets.  Gold was $2.00 lower at 7:24 a.m. Pacific Time on the New York Spot Market, trading at $1,599.10 per ounce.  Spot silver was $.14 lower, trading at $27.40 per ounce.  (Click here for the most current spot prices.)

ECB President Mario Draghi said in coming weeks the central bank would devise a plan to protect the euro which may include government bond purchases on the secondary market. The ECB’s failure to provide details regarding its support of the euro disappointed investors.  

 “Although gold may stay on the defensive near term, we believe any further weakness is likely to be short-lived, as investors may shift focus to the next [Federal Open Market Committee] meeting in September,” said James Steel, analyst with HSBC Securities.

The central banks of South Korea, Russia and Kazakhstan have recently increased their gold reserves according to the International Monetary Fund.  The Bank of Korea, with the world’s seventh largest foreign exchange reserves, increased gold holdings for the third time since June of last year. 

Kazakhstan plans to increase its gold reserves to 15 percent. “We’ve already signed contracts for 22 tons,” said Bisengaly Tadzhiyakov, deputy chairman of the central bank, on June 7. “The bank is ready to buy when suppliers are ready to sell.”

Russia purchased 6.2 tons of gold in June, bringing its substantial holdings to 917.5 tons, the most gold that Russia has held since at least 1993, when the IMF began tracking Russian holdings.

“Central bank buying of gold is one of the pillars supporting prices and it will continue,” said Nick Trevethan, senior commodities strategist at Australia & New Zealand Banking Group Ltd. (ANZ) “Asian central banks have a way to go in terms of boosting their gold holdings. We see scope for further accumulation.”

"Central bank activity is in part filling in for the tame retail physical buying from the likes of India of late by helping gold on the downside and inserting a price floor," UBS said in a note.

"In turn this has been providing investors with some comfort, that stronger hands are active sub $1,600, but importantly that their comfortable price entry is rising."  

(Sources:  “PRECIOUS-Gold holds above $1,600/oz ahead of ECB statement,” Reuters, August 2, 2012; “Gold steady after drop on Fed inaction, eyes on ECB,” CNBC, August 2, 2012; Korea Raises Gold Reserves Third Time Since June Last Year,” Bloomberg, August 2, 2012; “Gold straddles $1,600 as central banks eyed,” MarketWatch, August 2, 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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