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GDP Data and Extended Low Interest Rates Support Gold

Release Date: 
Friday, January 27, 2012

Gold moved higher on Friday following the release of U.S. GDP data showing the economy grew at a slower rate than expected in the last quarter of 2011 growth was slower than expected. Gold traded at $1729.90 per ounce at 7:56 a.m. Pacific Time on the New York Spot Market. Silver was also higher at $33.91 per ounce.

The GDP for the fourth quarter grew at 2.8%, falling short of an expected 3% increase. Total GDP growth for 2011 was 1.7%, nearly half of the GDP for 2010.

This week's Federal Reserve announcement that interest rates would remain at historic lows for the next three years and potential quantitative easing helped gold's upward trend in January. "After the Fed chairman's vow to keep the rates low until late 2014, strong buying interest was visible," said Pradeep Unni, senior analyst with Richcomm Global Services. "Anxious investors have joined the fray of speculators who are now increasingly concerned by currency depreciation, as global central banks use easy monetary policies to flood markets with cash."

"The market attitude towards gold for most of January could be summed up in two words: cautious optimism. Investors were reluctant to add to positions aggressively," said UBS in a note commenting on gold and the Fed statement. "A fresh catalyst was needed and we think the FOMC outcome on Wednesday fit the bill. More accommodative policy is a very good foundation for gold to build on the next move higher."

The Fed decision "awakened the positive gold sentiment" that had been underneath the surface but investors were cautious after a selloff in fourth quarter, said Jeffrey Wright, a senior research analyst with Global Hunter Securities. "Inflation is in the market; (it is) just being under-reported in my opinion," he said. The "miss" on fourth-quarter gross domestic product will give the Fed an "additional cover" to continue its "easing" stance and will also contribute to gold going higher, Wright added.

Gold traders surveyed by Bloomberg are bullish for a fourth consecutive week, with nine of 15 surveyed expecting price gains next week. Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt commented, "we don't see an end to the long-term uptrend in gold prices."

Gold prices are up approximately 10% this month and 3.3% for the week.

Bill Gross, who manages the world's largest bond fund, believes that a third, fourth and fifth round of monetary easing "lie ahead."

(Sources: "U.S. GDP Rises 2.8%," Wall Street Journal, January 27, 2012; "PRECIOUS-Gold set for biggest rise in eight weeks after Fed," Reuters, January 27, 2012; "Gold wavers after Fed-inspired rally," MarketWatch, January 27, 2011; "Gold Bulls Ascendant Amid Best Start to Year in Three Decades: Commodities," Bloomberg, January 27, 2012)

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