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Gold at Two-Week High on Inflation and Debt News

Release Date: 
Wednesday, July 6, 2011

The price of gold reached a two-week high on Wednesday as an interest rate hike from China placed the market's focus on inflation concerns. Worries over euro zone and U.S. debt boosted demand for gold, a traditional safe haven asset in times of uncertainty. Today's price increase extends the previous session's 1.3 percent rise with the yellow metal trading at $1526.60 per ounce at 7:09 a.m. Pacific Time on the New York Spot Market.

China is raising its interest rates for the third time this year after inflation accelerated to the fastest pace since July 2008. "I think China would need to raise rates higher and higher still until we start to see some kind of tapering off of their inflation figures," said VM Group analyst Carl Firman, who sees negative real interest rates in China due to its high inflation. "A lot of new middle-class Chinese have cottoned on to this, and there is a lot of demand for gold as a store of wealth under these circumstances. Their money is not earning anything, in fact you are getting negative returns now holding cash, whereas you are not getting that holding gold."

Moody's Investors Service yesterday slashed Portugal's rating four levels to Ba2 with a negative outlook, leading to speculation that the country will need another bailout package. The downgrade follow's a prior78 billion euro ($112 billion) aid package from the ECB and IMF in May. "Portugal's four-notch ratings downgrade is a reminder that Europe's debt problems are far from solved," Edel Tully, a London-based analyst at UBS AG, said in a report. "The issues surrounding the euro zone are going to last for quite some time, so they are something that markets are going to have to be dealing with on an ongoing basis," noted Macquarie analyst Hayden Atkins.

The possibility that the U.S. will fail to raise its debt limit resulting in a default is also boosting gold prices. President Barack Obama said he opposes a deficit-cutting measure that would only allow for a short-term increase in the U.S. debt limit as he negotiates with lawmakers. "The focus is increasingly on the U.S. debt ceiling debate. An increasing focus on U.S. fiscal worries should also lead to safe-haven and diversification bids," noted Tully at UBS.

Analysts at MF Global say gold will remain supported in July by expectations that global monetary policy will remain supportive, even though recent manufacturing data has improved. "The rebound in global manufacturing will simply return the economy to a sub-par rate of recovery, which should create an environment of slow but stable growth, volatility in inflation, and accommodative monetary policy," the firm said in a research note. "Such ingredients should maintain a favorable environment for the gold market this month." Reuters market analyst Wang Tao says the short-term technical picture has turned positive, with gold prices expected to rise further towards $1,550 per ounce.

(Sources: "PRECIOUS-Gold hits two-week high on inflation, debt concerns," Reuters, July 6, 2011; "PRECIOUS-Gold hits 1-1/2 week high after Portugal rating cut," Reuters, July 6, 2011; "Gold May Drop as Strengthening Dollar, Chinese Rate Increase Erode Demand," Bloomberg, July 6, 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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