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Is Recent Gold Price Caution Warranted?

Release Date: 
Friday, December 10, 2010

GOLD PRICE NEWS – The gold price posted a modest gain Thursday, rising $4.92 to $1,387.04 following the worst two-day slide for the price of gold since February 3-4 of this year.  After rising to as high as $1,395 this morning, the gold price pared its gains as investors remain concerned that the recent weakness in the price of gold has yet to fully run its course.

This concern is evident in two of the latest gold price sentiment readings, as the Hulbert Gold Newsletter Sentiment Index (HGNSI), a gauge of recommended market exposure by gold timers, declined 6.7 points to 46.9%.  Meanwhile, the most recent bullish sentiment reading from Market Vane dropped 4 points to 77%.

One factor working against the gold price is the budding view that economic growth will pick up in 2011, fueled by strength in emerging markets as well as fiscal and monetary stimulus in the U.S. and Europe.  PIMCO, which runs the world's largest bond fund, raised its U.S.economic growth outlook to 3-3.5%, from 2-2.5%. 

Mohamed El-Erian, CEO and co-CIO of PIMCO, cited the "massive amount" of stimulus being pumped into the economy as the main catalyst for the improved outlook.  In an interview today, El-Erian discussed the firm's positive outlook, but cautioned that "What we don’t know yet is whether that will be enough not just to change the economy’s trajectory for one year but to place it on a medium-term sustainable path.”

The PIMCO CEO went on to note, however, that policymakers are essentially "Kicking the can down the road in response to the symptoms of the new normal, but they’re not yet changing the medium-term dynamics."

While El-Erian did not discuss matters specific to the gold price, the implications of PIMCO's improved outlook, at least in the shorter-term, are negative for the price of gold.  Stronger economic data would provide the Federal Reserve and federal government with less evidence to maintain their current unprecedented levels of stimulus.  This in turn would lead to less currency debasement, which has been a driving factor behind the gold price's ascent in recent years.

However, as El-Erian alludes to, he does not currently believe that the economy can maintain this level of sustainable growth for more than a year.  Accordingly, until such time as policymakers can comfortably turn off the fiscal and monetary spigots, the longer-term outlook for the gold price remains intact.

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This article is independently provided by and does not represent the views or opinions of Goldline International, Inc. Although the information in this article 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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†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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