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Fundamentals Continue To Support a Gold Bull Market

Release Date: 
Friday, April 26, 2013

Gold and Silver Prices:

Gold prices rose well above $1400 on the New York Spot Market after hitting a two-year low last week, fueled largely by strong physical demand. Gold ended the week at $1463.90, up $56.40. Silver closed at $24.14, up $0.75 for the week.

Physical Demand – A Gold Rush

“As the price moved over $1,400 U.S. dollars/ounce, physical traders, on the expectation that gold could possibly correct back higher, rushed into gold. Physical demand continues to be very strong and could push the price higher over the coming days,” MKS Group’s senior vice president told MarketWatch. (“Gold prices shoot up 2.2% as ‘shorts’ shrink,” MarketWatch 4/22/13.)

“Our physical flows to Asia have been particularly elevated this week.” the president of the Hong Kong Gold & Silver Exchange Society said. “In terms of volume, I haven’t seen this gold rush for over 20 years… Older members who have been in the business for 50 years haven’t seen such a thing.” (“Asian bargain hunters pile into gold,” Financial Times, 4/22/13.)

Fundamentals Continue To Support Gold Bull Market

Financial journalist and author Matthew Lynn explained gold’s relationship to “economic chaos” and why the yellow metal remains in a bull market. “What gold really represents is a bet on economic chaos — and unfortunately there is plenty of that to come. The global economy faces three huge challenges — and each of them, when you look at them closely, are bullish for gold… First, the euro is the most dysfunctional currency system ever created, locking what remains the world’s largest economic block into permanent depression… Next there is a debt crisis. Whether the levels of debt all developed economies have built up will stop them from growing is still a controversial issue. It remains to be decided. What is certainly true is that governments and consumers everywhere have taken on far more than they can afford… Finally, the dollar is in long-term decline as the world’s reserve currency… At some point, those problems will be fixed… Until then, and despite market panics, gold remains a bull market. It is bet on a chaotic global economy. And that isn’t about to disappear any time soon.” (“Be bullish on gold as long as chaos reigns,” MarketWatch, 4/24/13.)

The chairman of FX Concepts, which manages currencies for institutional investors, echoed the view that a weak world economy and excess liquidity support gold prices. “I believe very much that you should own gold right now… I think you have to be bearish on the world economy…And the fact of the matter is what you're bearish is not on the economy, but you're becoming bullish on the fact that they're going to step on the gas and they're going to go out the other side and there's going to be a lot of liquidity. And gold leads that by a lot.” (“‘You Should Own Gold Right Now’: Pro,” CNBC, 4/25/13.)

$10,000 Gold?

A global strategist for French bank Societe Generale released a reporting forecasting gold to reach $10,000 per ounce. “With some rare exceptions…analysts don’t like to stand out from the crowd. It is dangerous and career-challenging. In that vein, we repeat our key forecasts of …gold above $10,000 [an ounce]…My working experience of the last 30 years has convinced me that policymakers’ efforts to manage the economic cycle have actually made things far more volatile. Their repeated interventions have, much to their surprise, blown up in their faces a few years later. The current round of QE will be no different. We have written previously, quoting Marc Faber, that ‘The Fed Will Destroy the World’ through their money printing. Rapid inflation surely beckons. But that will not occur without firstly a Japanese-style loss of confidence in policymakers as we dive back into recession and produce dislocative market moves.” (“Doomsday? SocGen Predicts S&P to 450, Gold at $10,000,” Barron’s, 4/25/13.)

Silver Court Rise Above $30 On “External Triggers” – GFMS

The head of precious metals research and forecasts at Thomson Reuters GFMS, Neil Meader, sees silver potentially rising by as much as 30% based upon an “external trigger.” “One such catalyst… would be if the U.S. economy wobbles further, meaning the Federal Reserve’s quantitative-easing program will last longer than many might currently expect. Another potential trigger could occur when U.S. budget and debt-ceiling negotiations intensify, perhaps around July. ‘If we get any word of a U.S. credit rating downgrade, that could be quite significant for the price,’ Meader said. ‘You only have to look back to the summer of 2011 when the U.S. had a credit downgrade. That added $200 to the gold price…You could easily get a scenario where we get back over $30 and maybe even get to $32,’ Meader said.” (“Thomson Reuters GFMS: Silver Could Reclaim $30/Oz In 2013,” Kitco News, 4/24/13.)

U.S. Mint Suspends Sales of 1/10th oz. American Eagles

The U.S. Mint announced that it was suspending sales of its smaller gold coins. “While the one ounce gold bullion coins remain the most popular, demand for the one-tenth ounce coins has remained strong too, with year-to-date demand for these coins up over 118% compared to the same period last year,” the Mint wrote to authorized purchasers. “Accordingly, the United States Mint has temporarily suspended sales of its one-tenth ounce gold bullion coins while inventories can be replenished.” (“U.S. Mint Suspends Sale of Smallest Gold Bullion Coin,” WSJ, 4/23/13.)

U.S. Economy Flounders

Three reports released this week suggest the U.S. economy continues to suffer from fundamental weakness. Demand for durable goods fell in March by the largest amount in seven months.  “The weakness that we see developing in China, the recession in Europe and the unknown about the weight of the fiscal restraint in the U.S. from the sequester, all those increase uncertainty for business,” said the chief economist at Credit Agricole CIB. (“Manufacturing in U.S. Cools as Durables Orders Slump,” Bloomberg, 4/24/13.)

The Commerce Department announced U.S. gross domestic product (“GDP”) only grew at an annual rate of 2.5% in the first quarter. This was well below the 3.2% GDP projected by economists. The disappointing growth “may silence those calling for the Federal Reserve to curtail its economic stimulus.” (“First-Quarter Growth, at 2.5%, Misses Expectations,” WSJ, 4/26/13.)

Goldline provides a wrap-up of the week's precious metals news along with important commentary on the American Advisor Week in Review audio program. Click here to listen.

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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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