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New Japanese Prime Minister Claims Mandate for Liquidity

Release Date: 
Tuesday, December 18, 2012

Japan elected a new prime minister in a landslide victory on Monday.  Prime Minister Elect Shinzo Abe called on Japan’s central bank to implement aggressive monetary stimulus at its forthcoming meeting. "The increased likelihood of more aggressive monetary stimulus by the Bank of Japan is maybe fuelling the rise in gold prices in the last hour or two," Christin Tuxen, an analyst with Danske Bank, said during morning trading.  "This news highlights low interest rates for a prolonged period."

Analysts at Commerzbank say the Japanese election is among the factors that are positive for gold.  “There are signs that the current price weakness is not sustainable ... and we envisage prices climbing significantly again in the medium term. Yesterday’s election in Japan, for example, is likely to have far-reaching consequences, among other things for the policy of the Japanese central bank,” said analysts at Commerzbank, in a note to investors.

“This week may in fact already see the Bank of Japan increasing its bond purchasing program yet again, for election winner Abe plans, among other things, to kick-start the economy and beat deflation by implementing aggressive monetary policy,” said the Commerzbank analysts.

A New York region manufacturing report showed a greater contraction more than expected, fuelling expectations for expanded Federal Reserve stimulus.  The Federal Reserve Bank of New York’s general economic index dropped to minus 8.1, wider than the minus 1 median forecast in a Bloomberg survey of economists.   “The thinking is that this lays the groundwork for even more Fed action,” said Matt Zeman, a strategist at Kingsview Financial in Chicago.

"Gold's post-FOMC price action has been muddied by other factors, such as (profit/loss) considerations, as year-end nears and uncertainty regarding the U.S. fiscal cliff lingers," UBS said in a note.  “Gold net longs were little changed,” the bank noted, “nevertheless, it cannot be ignored that, at least in the near term, investor confidence has taken a hit.”  According to UBS, “the subdued spec activity is a testament to the market's growing lack of appetite to take any large positions closer to year-end."

 (Sources:  “PRECIOUS-Gold steadies, U.S. fiscal fears in focus,” Reuters, December 17, 2012; “Gold Erases Loss as N.Y. Factory Slump Signals More Fed Stimulus,” Bloomberg, December 17, 2012; Gold remains below closely watched $1,700 mark,” Marketwatch, December 17, 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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