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Gold Rises More Than $20 on Liquidity Expectations

Release Date: 
Wednesday, July 25, 2012

Gold prices moved sharply higher as central banks prepare for further liquidity to aid struggling economies in the U.S. and Europe. Gold was $21.80 higher at 7:16 a.m. Pacific Time on the New York Spot market, trading at $1,603.90 per ounce. Spot silver was $.34, trading at $27.40 per ounce. (Click here for the most current spot prices.)

ECB policy maker Ewald Nowotny raised the possibility of providing the region’s rescue fund, the European Stability Mechanism, a banking license. The license would provide access to cheap funding from the ECB. Recently, investors have become concerned that the fund's resources would be greatly diminished should Spain require a full-scale sovereign bailout.

Federal Reserve officials are moving closer to providing new stimulus for the U.S. economy, according to a report in The Wall Street Journal. Since their June meeting, more officials appear inclined to add liquidity to the economy unless they see evidence of increased economic activity. Recent discussions inside the Fed have turned towards questions of how and when to act, rather than if a stimulus is required. The Fed may act as early as the July 31 and Aug. 1 meeting.   

Fed Chairman Ben Bernanke has discussed the importance of the economy achieving what he calls "escape velocity"—growth fast enough to give the economy forward, self-reinforcing momentum.

Policymakers who have opposed stimulus have softened their tone. "I know people feel like we haven't made enough progress," said James Bullard, St. Louis Fed president, said in an interview this month. Known as an "inflation" hawk who is wary of too accommodative a stance, Bullard said he would be prepared to act if inflation falls too low or if a new shock hits the economy.

The Commerce Department is expected to report this week that the economy grew at a rate substantially below 2% in the second quarter. The unemployment rate stood at 8.2% in June and has changed little since January. Retail sales have been slow in recent months and financial markets, especially those in Europe, are under stress.

"Four to six weeks will take us into an interesting time for the gold market, which we think should be more constructive," said Credit Suisse analyst Tom Kendall said.

(Sources: "PRECIOUS-Gold rises as ECB comments lift euro, stocks," Reuters, July 25, 2012; "Gold futures climb as the euro gains on dollar," MarketWatch, July 25, 2012;"Fed Moves Closer to Action," Wall Street Journal, July 25, 2012)

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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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