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Gold Price Correction Nearing an End?

Release Date: 
Friday, January 21, 2011

GOLD PRICE NEWS – The gold price traded dropped $5.96 to $1,340.02 Friday morning after tumbling $23.89 to $1,346.17 yesterday amid a confluence of headwinds. The price of gold has been under selling pressure all week with a stronger than expected GDP report in China being the latest downside catalyst.

With today’s retreat, the price of gold is now on pace for its third consecutive weekly decline and is lower by 5.0% year-to-date. The prospect of tighter monetary policy in both China and Brazil contributed to Thursday’s gold price sell-off after China’s 2010 GDP growth surged above 10% and Brazil’s central bank discussed the “starting of a process” of additional interest rate hikes.

Adding further fuel to the fire were three encouraging U.S. economic data points. Weekly jobless claims fell to 404,000, below the 425,000 expected by economists; existing home sales in December rose by 12.3%, or 5.28 million, above the 4.80 million forecasted; and December leading indicators of economic activity advanced 1.0%, greater than the 0.6% forecasted.

Commenting on the positive economic news, Michael Churchill of Churchill Research stated that, in spite of the gold price’s weakness in the face of improving economic data, the longer-term outlook for the price of gold remains bright. “In normal circumstances, improving economic data would suggest increasing risk of higher interest rates (generally bad for gold). But the Fed has made it abundantly clear that it is not going to raise interest rates until the economy gets much, much better. As such, data that normally would be gold-negative must be viewed through the prism of ‘It doesn’t necessarily matter anyway, because the Fed isn’t going to act on it.’

While acknowledging that the Federal Reserve will eventually raise interest rates, Churchill noted that the real (inflation-adjusted) federal funds rate has historically “needed to be over 2.5% for gold to fall.” That rate is currently at -0.55% and it would take a series of Fed rate hikes to exceed 2.5%. Furthermore, he noted that real interest rates are likely to stay in negative territory, presenting a favorable macro-economic backdrop for the price of gold in coming quarters.

Article provided by GoldAlert.com.


This article is independently provided by GoldAlert.com and does not represent the views or opinions of Goldline International, Inc. Although the information in this article 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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†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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