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Gold Rises as Fed Indicates Continued Stimulus

Release Date: 
Thursday, April 28, 2011

The price of gold extended its recent string of highs on Fed statements indicating the central bank would maintain its monetary stimulus, holding interest rates near zero. The precious metal traded at $1531.30 per ounce at 5:45 a.m. Pacific Time on the New York Spot Market.

The dollar fell to a three-year low versus a basket of six key currencies based on the Fed news. Generally, a weak dollar lifts the price of gold as a safe-haven asset to currencies.  Analysts at Investec Australia, Barclays Capital, MKS Finance, KEB Futures and Credit Suisse commented on the continued monetary accommodation from the Fed, the dollar and the related outlook for the price of gold.

"Gold has followed the misfortunes of the dollar," said Darren Heathcote, head of trading at Investec Australia. "It looks very difficult to find a reason to sell gold right  now, and technically we are targeting $1,550. Bulls are very much in control of this market at the moment."

While the Fed will keep its timetable to end stimulus fiscal purchases in June, Fed Chairman Ben Bernanke said the central bank plans to reinvest principal payments, thereby keeping monetary stimulus in place.  With interest rates near zero, ending the reinvestment policy would have amounted to the first tightening of monetary policy, said Barclays Capital Research analyst Michael Gapen. "Altogether, the statement, press conference, and updated set of economic projections tell us that the Fed will likely be patient when it comes to the eventual removal of policy accommodation," Gapen wrote. "We do not expect an increase in the federal funds rate until July 2012."

MKS Finance head of trading Afshin Nabavi noted, "The Fed decision was not really a surprise, nothing has changed, but the tone of the statement from Bernanke left the impression that it is going to be a while before any rate hikes will be considered." Hwang Il Doo, a Seoul-based senior trader at KEB Futures Co., said  "As long as the U.S. keeps interest rates low, it's perceived by the market to buy more gold."

"Gold remains in a stable uptrend," Tobias Merath, Zurich-based head of commodity research at Credit Suisse, wrote in a report yesterday. "We expect to see a renewed increase in investment demand over the coming month."

(Sources: "Gold extends record run as U.S. maintains stimulus," MarketWatch,April 28, 2011;  "Gold Climbs to Record as Bernanke Maintains Stimulus, Dollar Extends Drop," Bloomberg, April 28, 2011; "REFILE-PRECIOUS-Gold at record as dollar falls on Fed talk,"Reuters, April 28, 2011; "Gold Strikes Record as Dollar Wilts," CNBC, April 28, 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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