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Gold Rises on Higher Inflation

Release Date: 
Friday, March 15, 2013

American Advisor host Joe Battaglia provides a wrap-up of the week's precious metals news along with important commentary every week on the American Advisor Week in Review audio program. Click here to listen.

Gold rose this week on inflation concerns as U.S. consumer prices rose to their highest monthly rate since June 2009. Growing worries over the euro zone economy and dovish statements from European Central bank officials also supported the yellow metal. Gold was $13.70 higher this week, settling at $1593.90 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $0.23 lower, closing at $28.87 per ounce.

U.S. consumer prices, a measure of inflation, rose 0.7% in February according to government data.  A sharp rise in gasoline prices fueled the higher monthly inflation rate. Core prices, which exclude food and energy, rose 0.2%. 

"It is a global trend that the value of paper money is diminishing, which attracts investors to gold, a hard asset," said Li Ning, an analyst at Shanghai CIFCO Futures.  "That's why gold has been resilient recently even though we have seen good data from the United States, strength in equities and a firm dollar."

Investors will be watching the Federal Reserve policy meeting on March 19-20, to gauge the central bank's attitude towards monetary stimulus.

ECB council member Jens Weidmann, head of Germany’s Bundesbank, said that euro zone inflation pressures were abating, suggesting the ECB will maintain its accommodative monetary-policy stance “for as long as necessary…”

U.K. industrial production unexpectedly fell in January from a month earlier.  In February, Bank of England policy makers said they “stand ready” to increase stimulus action to support the recovery. The weaker-than-anticipated data is supportive of higher gold prices as it reinforced the ongoing need for loose monetary policies from the world's central banks, traders at TD Securities said.

"I think there is a feeling that the risk appetite is gone too far and I wouldn't be surprised to see equities pulling back and gold coming back into favor a bit in coming days," Standard Chartered analyst Dan Smith said.  "Obviously, the euro strength is helping gold prices to hold above $1,590 and it seems to me that there is more upside risk than downside risk for the time being."

Robert Rennie, a chief strategist with Westpac Bank, said, better-than-expected U.S. retail sales data and a stronger U.S. dollar overnight weighed down gold prices earlier in the week, but "we still think it is a seasonal story and the seasonal headwinds become much more noticeable in the second quarter.”  According to Mr. Rennie, seasonal headwinds and fiscal issues will be supportive for gold prices.  "As we move through what felt like a seasonally boosted 1Q and into a seasonally hampered 2Q...that is something that clearly supports gold."

Deutche Bank notes long term threats to the broader economy.  “With continued confidence in the U.S. economy and a lack of apparent concern for the global economy in general, gold is struggling…” analysts at the bank said.  “While we see threats to the global financial system longer-term, the market is momentarily preoccupied with the next quarter rather than the next year.”

Phil Storer, director of trading at Dillion Gage Inc., said, “we are living in what could be a new and therefore frightening era that will generate much greater interest in the precious metals than we’ve seen so far.”  Storer said the price “congestion area” that gold and silver are in right now is probably going to be the launching pad for much higher metals prices and if he’s right, the market will soon see “the beginning of that upward bias quite soon.”

Technical analysis shows that large speculators in gold including hedge funds and commodity trading advisers may be priming the market for a surge higher after recent price action.  On Tuesday, the market saw “mild short-side covering” above the $1,585 to $1,587 per ounce level and also fresh buying after prices failed to hold below the $1,565 support level for a third straight week on Friday, said Fawad Razaqzada, technical analyst at GFT Markets.  “This indicated that the sellers had enough, leading to the bulls coming back into bullion.”

“If the [hedge] funds are convinced gold’s correction is done, that means they have a much larger short position this time to cover,” the GFT analyst said. “That’s high-octane buying pressure.” 

“Locals and smaller traders will want to front run the specs too, adding to the violence of the short-covering rally,” he said. “That could cause quite a surge in the futures price for gold short term, and it’s how the gold pullback last year ended.”

Central banks are increasing purchases of gold, yen and the Chinese yuan to reduce their dollar and euro holdings, the World Gold Council (WGC) said.  Official sector holdings increased to more than $12 trillion in 2012 from $2 trillion in 2000, the WGC noted. 

The WGC expects central banks to remain strong buyers this year after increasing purchases in 2012 by the most in almost five decades. Russia’s Bank Rossi, one of the largest official sector purchasers of gold, increased its reserves for a fourth straight month in January while Kazakhstan also increased its reserves.

“Building gold reserves in tandem with new alternatives is an optimal strategy as central banks remain under-allocated to gold and many attractive alternatives are either too small or, as is the case with the renminbi [yuan], not yet open to broader international participation,” WGC’s manager for government affairs wrote. Central banks added 534.6 tons to their gold reserves in 2012, the most since 1964.

Central bank demand will continue to support gold prices, said Michael Lewis, global head of commodities research at Deutsche Bank.  “The public sector keeps buying," he said.

There's a net flow of gold from western countries to China, Russia and Southeast Asia which are generally buying on the dip, Singapore-based BullionStar wrote in a research note on Tuesday.  "We believe that the Chinese are buying as a long-term strategy to diversify and become less reliant on U.S. (and Europe/Japanese) debt instruments," it said.  India's spring wedding season, an auspicious time to buy gold, may also lend gold prices some support.

Howard Wen, an analyst at HSBC in New York, said Chinese demand is a factor supporting gold prices.  “China has been relatively strong since prices had fallen below $1,600. Physical buying has been active over there,” Wen said. “It has slowed a bit, but it’s still positive for the bullion market.”

Rangold Resources Ltd., a major gold miner, believes that gold may rise as central banks in emerging markets buy the precious metal and producers limit new production of gold.  The gold market is showing signs of inelasticity, supply is tight and production costs are high, said Rangold CEO Mark Bristow. 

“I still believe there’s more upside than downside in the gold price, particularly if the industry is going to be driven to make those hard decisions,” Mr. Bristow said.  “I don’t think there’s much room to go below $1,500 this year and I still believe there’s every potential for it to go $200 above that.”

Afshin Nabavi, senior vice president at bullion refiner MKS (Switzerland) SA in Geneva, said “physical demand still remains strong, from the Far East mainly. There seems to be bargain hunting every time around the $1,570 an ounce area.”

“There’s very aggressive buying into dips,” said Dave Meger, director of metals trading with Vision Financial Markets. “With the Fed stimulus still in place, the market feels the physical demand will pick up,” he added.

Walter de Wet, head of commodity strategy at Standard Bank, indicated in a note to clients that gold is undervalued at current price levels.  “We pin our fair value at $1760 for gold,” he said, while acknowledging a current short-term struggle to reach that level.

 

(Sources:  “Gold Futures Inch Higher On Inflation Data, Dollar,” Wall Street Journal, March 15, 2014; “PRECIOUS-Gold heads for second week of gains,” Reuters, March 15, 2013; “PRECIOUS-Gold lingers around $1,590, heads for 2nd weekly gain,” Reuters, March 15, 2013; “Gold rises a little, taking cues from dollar,” Marketwatch, March 15, 2013; Gold Set for Weekly Gain Amid Signs of Physical Demand, Recovery,” Bloomberg, March 15, 2013; “Gold Slightly Lower in Asia; Precious Metals Await Fresh Cues,” Wall Street Journal, March 14, 2014; “Gold Prices Retreat On Brighter U.S. Data, Stronger Dollar,” Wall Street Journal, March 14, 2014; “Gold extends losses into a second day,” Marketwatch, March 14, 2013; “Central Banks Seen Buying More Gold, Yen, Renminbi to Diversify,” Bloomberg, March 13, 2013; “PRECIOUS-Gold holds near two-week high on euro zone concerns,” Reuters, March 13, 2013; “Gold Slightly Higher in Asia; Europe in Focus,” Wall Street Journal, March 13, 2013; “Commodities Daily,” Standard Bank, March 12, 2013; “Gold futures settle near two-week high,” Marketwatch, March 12, 2013; Gold Heads for Longest Rally in Six Months on Easing Speculation,” Bloomberg, March 12, 2013; “Gold Futures Climb 1% on Weaker Economic Data, Dollar,” Wall Street Journal, March 12, 2013; “Gold futures climb toward $1,600 an ounce,” Marketwatch, March 12, 2013; “PRECIOUS-Gold above $1,590 as continued euro zone easing seen,” Reuters, March 12, 2013; “Gold futures edge up, but stay below $1,580,” Marketwatch, March 11, 2013; “PRECIOUS-Gold edges up but firmer dollar weighs,” CNBC, March 11, 2013; Comex Gold Gains in Quiet Trade as Chinese Inflation Rises,” Wall Street Journal, March 11, 2013; “Randgold CEO Sees Upside for Gold on Central-Bank Buying,” Bloomberg, March 7, 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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