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Gold Higher as GDP Contracts

Release Date: 
Saturday, February 2, 2013

Gold rose this week as the U.S. GDP declined in the fourth quarter, its first downturn in three years.  Monthly employment data for January released this week trailed expectations, adding to concerns over the U.S. recovery.  Gold was $9 higher this week, settling at $1669.00 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $0.13 lower, closing at $31.43 per ounce.

The economy reversed course from its 3rd quarter growth because federal spending fell by 15% and private business inventories decreased.  “A technical analyst at GFT Markets wrote, “[i]nvestors rushed to buy gold and silver [on the GDP data] … The metals were already looking bullish … but today’s reaction has nevertheless confirmed that investors still see gold and silver, above all, as safe haven assets….”

The Federal Reserve maintained its monthly $85 billion bond-buying stimulus on Wednesday and reiterated its pledge to continue the program until the outlook for employment "improves substantially."  The central bank opined the recent contraction in fourth quarter GDP was probably temporary.

U.S. employers added 157,000 jobs in January, the Labor Department said.  The unemployment rate increased one-tenth of a percentage point to 7.9%.  A broader measure of unemployment, which includes job seekers as well as those in part-time jobs, held steady at 14.4% for the month. The unemployment rate is well above the 6.5% Federal Reserve target when it would tighten monetary policy to encourage higher interest rates.    

Economists surveyed by Dow Jones Newswires expected nonfarm payrolls to rise by 166,000 in January and the unemployment rate to hold at 7.8%.  “The unemployment rate ticked up a bit, and the Fed has said they’ll hold rates low until that comes down,” said Phil Streible, a senior commodity broker at R.J. O’Brien & Associates. “The Fed will keep going on its mandate, and that’s helping gold.”

"Gold is reasserting itself as a flight to quality asset," said Adam Klopfenstein, senior market strategist with Archer Financial.  "Bad news means that the Fed isn't going to rein in its QE as quickly as people thought.”

“Gold is up as QE3 is still warranted,” commented Andrey Kryuchenkov, analyst at VTB Capital in London.

Prices will rally this year and into 2014 on central banks’ stimulus measures, according to Morgan Stanley.  The bank expects Federal Reserve policy makers to maintain asset purchases for two more years to aid economic recovery.  Investment and central bank buying will support prices, analysts Peter Richardson and Joel Crane wrote.

Eugen Weinberg, head of commodities research at Commerzbank, said as inflationary pressures become more visible in the second-half, it will lend support to gold prices which could reach $2,000 per ounce at some point in the fourth quarter or early 2014.

"The continuation of quantitative easing is definitely bullish for gold," said Barnabas Gan, commodities analyst at OCBC Bank.  A break above the $1,700 per ounce resistance level will likely spur further gains, he added.

“A reevaluation of the U.S. economic recovery combined with a reaffirmation of a highly accommodative monetary policy is gold-bullish,” Howard Wen, an analyst at HSBC Securities (USA) Inc., wrote in a note.

"The Fed will maintain its bond-buying policy and we see economic conditions in the euro zone improving slightly. I think we can see more weakness in the U.S. dollar and as a result we may see gold going up a bit more," said Joyce Liu, investment analyst at Phillip Futures in Singapore.

Russia and Kazakhstan increased their gold reserves in December.  Russian holdings climbed 2.1 increasing the countries total reserves by 8.5 percent.  Kazakhstan increased its gold reserves by 41 percent during 2012.  Turkey’s gold reserves grew by 14.5 percent.  Central banks need to “diversify into gold as the euro zone is not yet out of the woods,” said Lynette Tan, a senior investment analyst at Phillip Futures in Singapore. “This will provide long-term support for gold prices.” 

Gold may climb to a record above $2,000 per ounce and average between $1,700 and $1,800 per ounce this year as “investment demand remains high,” according to Vitaly Nesis, CEO of Russian gold and silver miner Polymetal International Plc.  “This year, central banks’ purchases will be the main demand driver,” Mr. Nesis added.  According to Thomson-Reuters GFMS, central bank purchases increased 17 percent to 536 metric tons last year, the most in 48 years.

Philip Klapwijk, global head of metals analytics at GFMS and Goldline newsletter contributor, said he "strongly" expects gold prices to post bigger gains this year than last. Mr. Klapwijk says he believes near-zero interest rates will persist in developed economies such as the U.S., Europe and Japan through this year, which makes gold a competitive alternative to holding money in a bank account.  Low interest rates "continue to support investor interest in gold in the absence of low-risk investments that can offer acceptable yield," he said.

In his “Basic Points” publication, global commodities strategist Don Coxe stressed the importance of including gold as part of a portfolio. “The astonishing recent increase in Chinese and Indian economic power and personal wealth have naturally meant that interest in gold as an investment among citizens in those countries has surged…The richer Indian people become, and the richer Chinese people become, and the more than central bankers have reason to worry about the politics and profligacy of the Eurozone and the US, the more those gold buyers will influence gold prices.…”

“Gold’s long-term outlook remains bright,” Mr. Coxe said.  “It may be the last asset left standing if governments run out of money to spend and central banks run out of money that people believe in…But it doesn’t require Apocalypse to be a sound, long-term investment …It is almost impossible to conceive of a more bullish long-term backdrop for gold.”

David Donora, head of commodities at Threadneedle Investments, said he plans to maintain his 11% gold exposure.  Noting central bank purchases and limited supplies, he said, "We're feeling pretty bullish on gold and consider those long-term fundamental drivers that have been supporting the market still very much intact…"

Jeffrey Sica, president and chief investment officer of Sica Wealth Management, is boosting his fund's exposure to gold.  He says he plans to increase the share of his fund's portfolio dedicated to gold from the current 7% to 25% over the next few months.

“Gold, long-term, is still number one,” said Warren Gilman, Chairman & CEO at research and investment firm CEF Holdings, commenting on his best commodity play for 2013. 


(Sources:  “Gold futures shoot higher in wake of jobs data,” Marketwatch, February 1, 2013; “Economy Adds 157,000 Jobs,” Wall Street Journal, February 1, 2013; “Gold Rises as Jobs Data Signal Economic Growth, Inflation,” Bloomberg, February 1, 2013; “Gold Trades Near One-Week High on U.S. Economy, Fed’s Stimulus,” Bloomberg, January 31, 2013; “Gold Rises in Asia; Precious Metals Mixed as US Jobs Data Eyed,” Wall Street Journal, January 31, 2013; “PRECIOUS-Gold surrenders gains as euro, stocks retreat,” Reuters, January 31, 2013; “PRECIOUS-Gold holds near 1-wk high on Fed; TOCOM hits record,” Reuters, January 31, 2013; “Gold or Platinum—Which Will Get to $2,000 First?CNBC, January 31, 2013; ““U.S. Economy Unexpectedly Contracts in Fourth Quarter,” Wall Street Journal, January 30, 2013; “Gold Seen by Polymetal Climbing to Record Above $2,000,” Bloomberg, January 30, 2013; “Gold Jumps On Weaker U.S. GDP Data, Fed Fears Fade,” Wall Street Journal, January 30, 2013; ““U.S. Economy Unexpectedly Contracts in Fourth Quarter,” Wall Street Journal, January 30, 2013; “Gold rises after drop in GDP and ahead of Fed,” Marketwatch, January 30, 2013; “‘…Impossible to conceive of a more bullish long-term backdrop for gold'—Coxe,” Mineweb, January 28, 2013; “Russia, Kazakhstan Expand Gold Reserves as Central Banks Buy,” Bloomberg, January 28, 2013; “PRECIOUS-Gold holds near 2-week low ahead of U.S. Fed meeting,” Reuters, January 28, 2013; “Commodities in for a Good 2013: Pro,” CNBC, January 27, 2013; “Gold Bulls Are Holding On,” Wall Street Journal, January 25, 2013)

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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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