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Goldman: Gold May Rally as Currency of Last Resort

Release Date: 
Friday, May 11, 2012

Gold prices came under pressure as the dollar rose on continued worries over Europe. Gold traded $12.10 lower at 6:13 a.m. Pacific Time on the New York Spot market, at $1,582.30 per ounce. Spot silver was $0.41 lower, trading at $28.73 per ounce. (Click here for the most current spot prices.)

"May is turning into a trouble month for investors in most asset classes once again. Gold, offering high liquidity, is being hurt by the need to realize cash and move to the sidelines," Saxo Bank vice president Ole Hansen said. "We saw another sweep lower this morning assisted by another upside attempt on the dollar," he said. Nonetheless, the downward move could soon run out of steam, Hansen noted.

"If Greece avoids a default, the question becomes how much stimulus will there be going forward in Europe in order to pull out all the stops and avoid defaults," said George Gero, precious-metals strategist with RBC Capital Markets.

Despite falling gold prices this week , Goldman Sachs reiterated its forecast for a rally in the yellow metal later this year. The bank said gold could advance to $1,840 an ounce over six months on a third round of fiscal stimulus. The Fed will announce additional monetary easing when policy makers meet next month, Jan Hatzius, chief economist at Goldman, predicted in a report on May 8.

Gold remains the "currency of last resort," according to a report from Goldman analysts including Jeffrey Currie. "In early 2009, we suggested that gold had become the currency of last resort, overtaking the U.S. dollar's status due to the rising risk of sovereign default and debasement concerns," Currie wrote. Even as the dollar advanced and gold fell on the European crisis in recent months, "it is too early for the dollar to reclaim this status," he wrote.

"The case for higher gold prices remains in place," Goldman analysts wrote. "U.S. economic and employment data has now disappointed for several weeks, European election results point to further stress in the euro area, while anecdotal data suggests that physical gold demand remains resilient."

(Source: "Goldman Stands By Gold-Rally Forecast Even as Price Drops," Bloomberg, May 11, 2012; "PRECIOUS-Gold hits 4-month low as dollar rises, stocks slide," Reuters, May 11, 2012 "Gold Ends Slightly Higher," Wall Street Journal, May 10, 2012)

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