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Gold Up as JP Morgan Forecasts $2,500/oz in 2011

Release Date: 
Tuesday, August 9, 2011

The price of gold continued its upward movement today as investors sought safe haven assets during the continuing global downturn and economic uncertainty.  JP Morgan revised its forecast for gold up to $2,500 per ounce by the end of the year on the U.S. debt downgrade by S&P and very high volatility, saying its earlier forecast of $1,800 was "too conservative." The yellow metal traded at $1741.10 per ounce at 6:54 a.m. Pacific Time on the New York Spot Market.

Economists at leading financial institutions have scaled back expectations for U.S. economic growth, a Reuters poll found. This week and last, JP Morgan, Goldman Sachs, Morgan Stanley, ANZ, UBS, MF Global and Barclays Capital all upgraded their gold price forecasts.

"Markets are now worried about another global recession. Out of Europe, French bond yields have widened on expectations of sovereign debt downgrade because of the country's exposure to

peripheral European debt," said Natalie Robertson, a commodities strategist at ANZ. "I think everyone was also looking at the 7 percent drop in the S&P 500." Robertson added, "The global financial crisis only happened a few years ago. I think everyone is very aware of that fact and there are a lot of linkages with what’s happening now with what happened three years ago."

"The market's near-term focus will be on further ratings downgrades to come," said Tom Pawlicki at MF Global. "The FOMC meeting is today, and any potential action to implement further easing will also offer support. In the background, support [for gold] will come from central bank buying, investment inflows, and weakness in economic data."

"The much-dreaded AAA downgrade did happen after all, but the broader market was already to an extent in sell-off mode, pricing in sovereign default risks in the euro zone and the U.S.," Andrey Kryuchenkov at VTB Capital wrote in a report. "The market remains well-supported while macro concerns over the stagnant economic recovery and fears of further sovereign downgrades will keep the market on edge."

UBS strategist Edel Tully wrote that "... the ingredients are all in place for a stronger gold price, as the metal is not subject to the risk of intervention or quantitative easing." Speculation is growing that the U.S. Fed will start another round of monetary easing to stimulate growth. Kenneth Rogoff, a Harvard University economist, said the bank will embark on a third round of asset purchases. "The purchasing power of dollar-based assets will decline should the Fed decide to announce QE3," Adam Klopfenstein at MF Global Holdings Ltd. said, referring to quantitative easing. "The flight-to-quality money is flowing into gold as there is still a lot of uncertainty in the economy."

 (Sources:  "UPDATE: JP Morgan Joins Goldman Sachs In Upping Gold Forecasts," Wall Street Journal, August 9, 2011; "PRECIOUS-Gold hits record for second day as investors dump stocks," Reuters, August 9, 2011; "Gold Tops $1,770 in Biggest Three-Day Rally Since 2008," CNBC, August 9, 2011; "Gold Tops Record $1,780 as Investors Seek Haven from Share, Commodity Rout," Bloomberg, August 9, 2011)

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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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