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Fed Minutes and Jobs Data Influence Gold

Release Date: 
Saturday, January 5, 2013

Gold rose 7 percent in 2012, but had a mixed week at the start of 2013.  Gold gained as Congress passed legislation to avoid the fiscal cliff and employment data proved weak, but Fed minutes suggesting the central bank may reduce or eliminate monetary stimulus in 2013 weighed on precious metals.  Gold was $9.30 lower this week, settling at $1,648 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $0.81 lower, closing at $29.32 per ounce.

Fed minutes indicated that “several” Fed officials thought the central bank may be able to slow or stop its bond purchasing program well before December 2013 while a “few” members said the plan would likely be needed until about the end of the year.  Some members did not set a specific time frame to end this program. 

"We've had a big reaction from gold to the Fed minutes, and the dollar has strengthened," Standard Chartered analyst Daniel Smith said.  "People are concerned that the quantitative easing program (QE) may be withdrawn sooner rather than later," Smith added.  Christin Tuxen, an analyst with Danske Bank, said the gold market had been focused on the size of the QE program rather than on when it would be phased out.  "The timing will be earlier than the market had been initially expecting,” Tuxen said.

Despite the belief among some Fed members that the stimulus program may be ended early, Friday’s employment data showed the U.S. added fewer nonfarm payrolls for December than expected by economists.  For the week ending December 29, initial jobless claims reached a five-week high with new unemployment applications rising 10,000 to a seasonally adjusted 372,000.  Economists had forecast claims to total 360,000.  In the week ending, Dec. 22, continuing claims rose by 44,000 to a seasonally adjusted 3.25 million.

Several analysts said the fiscal cliff agreement’s failure to reduce spending may support gold.  “We suspect gold will likely do better over the next few weeks as the colossal failure of political will to get America's fiscal house in order should provide fodder for the gold bugs to bid prices higher," said Edward Meir, metals analyst at brokerage INTL FCStone.

“Euphoria over the fiscal-cliff avoidance could be short lived as all problems are not solved yet,” said Frederique Dubrion, the Geneva-based president and chief investment officer of Blue Star Advisors SA, which manages metals and energy assets. “There’s still a huge amount of debt. Gold is nobody’s liability, it’s the ultimate alternative currency.”

Jeffrey Wright, managing director at Global Hunter Securities, expects the dollar to depreciate. “We believe gold is positioned to go higher in the near term with the fiscal cliff deal further weakening U.S. dollar over time…The way I see it is, [the fiscal cliff] package increased taxes and spending with zero emphasis on reigning in spending.  Over time, this will put more pressure on U.S. dollar and enhance gold.”  Nataxis analyst Nic Brown agrees, "gold will be benefiting from an anticipation that the dollar will weaken.”

"Gold prices have been an economic and political barometer for the well being not just of the economy, but of the world," said George Gero, vice president of global futures at RBC Capital Markets.  "There have been plenty of problems and we're going to return back to basics after the fiscal cliff," he said. "Sometime after January, people are going to take a second look at the world and say 'you know what, I do need someplace to put my money'."

“The problems we’ve seen over the last year haven’t disappeared,” agreed Thorsten Proettel, a commodities analyst at Landesbank Baden Wuerttemberg in Stuttgart. “There is still lots of potential for trouble in the world and that is a good reason for people to stay in gold or buy more.”

Warren Gilman, Chairman and CEO of CEF Holdings, said “I think 2013 will see gold continue to rise.  The result we had with respect to the fiscal cliff debates just pours a lot more hot oil on that fire, with respect to no decrease in spending.  A $16.4 trillion debt ceiling [will rise].  We’re going to have to print substantially more U.S. dollars and it seems like every economic group from the U.S. to the Euro zone to Japan can’t debase their currency quickly enough.  They’re all racing to the bottom and the one sure beneficiary of that is gold in the medium to long term.”

Bill Gross, CEO of PIMCO, believes gold and other commodities will move higher this year, while stocks and bonds will see lower returns and unemployment will rise.   “Generally all asset markets are in this period going forward, in which less than double-digit returns are going to be the order of the day,” Mr. Gross noted.  “We have come to expect in the asset markets a 10%-plus type of return for taking equity risk.  And really if the real economy only grows at 2% to 3%, then it is a case of spending straw into gold and how long that will continue.”

Chris Blasi, CEO of Neptune Global Holdings, predicted that gold could reach upwards of $1,900-$1,950 per ounce in 2013.  He cited central bank buying as one key support and noted that the Bank of International Settlement has reclassified gold as a Tier 1 asset for 2013, which has far-reaching implications.  “That’s significant, just as far as the perspective of where’ gold’s place is as money,” he said.

“I believe gold is a long-term store of wealth and should be a part of every portfolio,” Mr. Blasi said.  “Since I believe it’s a longer-term hold, we believe that physical holding is of great value.  This is one of the unique assets that an investor can actually own directly and not have a financial instrument put between them and the asset.”

"In the case of gold, we still target the level of $1,950 an ounce over the next three months,” UBS said in its 2013 outlook report.  During the first quarter of 2013, economic uncertainty “warrants a defensive posture… We therefore think gold and platinum are an outright buy at present levels as both metals have very low supply elasticity and are key beneficiaries of loose monetary policy.”

Andrew Su, CEO of Compass Global Markets, said “we still think gold will be headed toward new record highs in the first and second quarters of next year,” at about the $1,900 per ounce level. “I think gold will approach $2,000 in the next six months,” he said.  Mr. Su sees investors fleeing from risk assets and predicts central banks, including the Federal Reserve, will be required to provide further fiscal stimulus.  “I think precious metals will outperform.  I think every other market is in for significant falls this year….”

"Since 2008, gold has correlated the best with our national debt ceiling," said Edmund Moy, chief strategist of Morgan Gold and a former director of the U.S. Mint.  "If Congress lifts that debt ceiling to $18 trillion, I see gold rising to $1,800…”

Helen Lau, an analyst with Singapore securities company UOB Kay Hian, said gold could reach $1,800 per ounce in 2013 on continued liquidity from the Federal Reserve and other central banks including the Bank of Japan.

The outlook for gold is "still positive," said Dominic Schnider, head of commodity research at UBS Wealth Management.  "All of the elements for higher precious metal prices are here. The Fed is continuing its stimulus, balance sheets are exploding around the world, and real interest rates are in negative territory."

Twenty of 27 analysts surveyed by Bloomberg expect prices to rise next week.


(Sources: “Fed sees bond buying ending this year,” Marketwatch, January 4, 2013; “Gold’s Fed-linked losses tempered by jobs data,” Marketwatch, January 4, 2013; “PRECIOUS-Gold falls to 4 1/2-month low after Fed minutes,” Reuters, January 4, 2013; “Gold Seen Rallying From Worst Streak in Eight Years: Commodities,” Bloomberg, January 4, 2013; “Gold futures pull back after cliff-rally,” Marketwatch, January 3, 2013; “U.S. jobless claims rise 10,000 to 372,000,” Marketwatch, January 3, 2013; “Gold Reaches Two-Week High as Commodities Gain on Budget,” Bloomberg, January 2, 2013; PRECIOUS-Gold regains strength, U.S. fiscal crisis ends,” Reuters, January 2, 2013; “PRECIOUS-Gold hits two-week peak after U.S. budget deal,” Reuters, January 2, 2013; “Precious Metals to Outperform in 2013CNBC, January 1, 2013; “Bearish on Energy in 2013,” CNBC, January 1, 2013; “Pimco's Bill Gross: Fearless 2013 Forecasts,” CNBC, December 31, 2012; “Gold Edges Higher in Asia; Precious Metals Mixed in Cautious Trading,” Wall Street Journal, December 30, 2012; “Gold May Be Down but Bulls Aren't Counting It Out,” CNBC, December 29, 2012; “Could 'Cliff' Failure Boost Gold Prices?CNBC, December 28, 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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