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Fiscal Cliff Threat Expected to Keep Fed Dovish

Release Date: 
Monday, December 10, 2012

The price of gold moved higher ahead of a key Fed meeting that begins tomorrow.  Gold was $8.10 higher at 7:09 a.m. Pacific Time on the New York Spot Market, trading at $1,713.60 per ounce.  Spot silver was $0.17 higher at $33.38 per ounce.  (Click here for the most current spot prices.)

Investors anticipate further easing from the Fed despite a drop in November’s. unemployment rate last week, said Peter Fertig, a consultant with Quantitative Commodity Research.  "As long as the fiscal cliff is looming, the Fed is not going to spurn monetary stimulus," he said.  The central bank is expected to announce $45 billion in new bond purchases to replace its “Operation Twist” program due to expire at the end of the year.

"Despite the upbeat tone of the most recent data, our economists do not expect a less dovish stance at the FOMC's December meeting due to the downside risk posed by the fiscal cliff," Barclays Capital said in a note. "Continuity is the theme for U.S. monetary policy…Our economists expect the highly accommodative stance to remain in place for 2013, given that even if Bernanke steps down as FOMC chairman in 2014, President Obama will likely choose a replacement who shares Bernanke’s views.”

Given supportive U.S. monetary policy and other factors, Barclays Capital analysts said they “believe the risks for gold are most skewed to the upside.”  The bank has a gold price target of $1,810 per ounce in the fourth quarter of 2012.

Central bank stimulus will help revive growth and demand for raw materials, said Dan Denbow, a fund manager at USAA Precious Metals & Minerals Fund, which has $2.1 billion in assets.  “Globally, we’re going to have to keep the printing presses running, and that’s going to lead to the devaluation of global currencies…That’s going to be supportive of gold prices” and commodities in general, he said.

(Sources:  “PRECIOUS-Gold firms on expectations of U.S. monetary stimulus,” December 10, 2012; “Speculators Cut Bullish Bets on Fiscal Cliff Talks: Commodities,” Bloomberg, December 10, 2012; “Barclays Gold Bull: Back to square one,” Commodity Online, December 10, 2012; “Gold futures edge higher after data deluge,” Marketwatch, December 10, 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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