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March 20, 2013

Release Date: 
Wednesday, March 20, 2013

Gold retraced its gains from Tuesday following statements from the Federal Open Market Committee (“FOMC”) stating the Federal Reserve understood the costs of its easy monetary policy and would continue to monitor the U.S. economy. Nonetheless, the FOMC reaffirmed its long term commitment to quantitative easing:

“The Committee will closely monitor incoming information on economic and financial developments in coming months.  The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.  In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.”

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (FOMC Press Release, 3/20/13.)

The Chief Executive for Goldcorp, Chuck Jeannes, the second largest gold mining firm, believes gold prices will reach record prices in the coming years due to inflation and safe haven buying. Speaking to the Wall Street Journal, Mr. Jeannes said, “[Analysts] think everything is perfect and the U.S. economy is going to ignore $16 trillion of debt and Europe is fine and China has had a soft landing. If you do believe that, what will be the ultimate result of a strong economy in combination with very loose monetary policy around the world? It will be an inflationary environment….By the end of this year we will be higher than the start of the year, and we will hit $2,000 gold in the next two to three years.” (“Goldcorp CEO Unfazed by Mining Rough Patch,” WSJ, 3/20/13.)

Greg Robinson, CEO of  Australia’s largest gold producer, Newcrest Mining, Ltd., offered a similar analysis while addressing a conference in Hong Kong: “If I look at the preconditions for the gold price in the medium term, I think about monetary supply, currency devaluation, interest rate, inflation, political economic drivers, I’m confident about the gold price. I expect them to stay strong for the medium term.” Mr. Robinson believes gold will trade between $1500 and $2000 this year. (Newcrest Mining Confident on Gold Price on Supply, Haven Appeal,” Bloomberg, 3/20/13.)

Speaking at the same conference, Eric Sprott, founder of the fund manager Sprott Inc., warned attendees that the economic crisis is far from over. “There’s more reasons to own gold today than there have ever been reasons to own gold…I hardly think the crisis is over. The crisis is in full bloom.” (Newcrest Mining Confident on Gold Price on Supply, Haven Appeal,” Bloomberg, 3/20/13.)

The Cyprus bailout continued to dominate financial news as the eurozone nation scrambled for to raise €5.8 billion after the Cyprus Parliament rejected the proposed tax on bank deposits. Speculation is growing that Russia may provide aid to avoid a banking collapse. Cyprus’s banking system is reportedly a haven for Russian oligarchs and underworld figures who would suffer if the banks collapsed. Among the proposals considered, Russia may provide aid in exchange for rights to natural gas and other Cyprus assets. (“Cyprus needs to fill a $7.5 billion hole,” MarketWatch 3/20/13.)

Gold may benefit if the Cyprus crisis spreads to other countries. “Investors also likely wonder whether what’s happening in Cyprus will spread to much larger and ‘impactful countries’ like Italy, Spain, or Portugal,” according to Jeffrey Wright, managing director at Global Hunter Securities. “If so, then safe-haven demand for physical gold could pick up in Europe, quickly. The euro could weaken but also strengthen gold at the same time.” (“Gold logs first loss in five sessions,” MarketWatch, 3/20/13.)

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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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