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UBS Raises Gold Forecast on Growth, Debt Concerns

Release Date: 
Wednesday, August 3, 2011

Concerns over slowing global economies and sovereign debt continued to push the price of gold higher amid a declining stock market, higher demand for safe-haven assets and increased central bank purchases of gold. Gold again reached a new record high, trading at $1673.10 per ounce on the New York Spot Market. UBS raised its three-month forecast to $1850 per ounce for gold from $1600 in light of the current issues involving growth and debt.

A report yesterday indicated that U.S. consumer spending fell in June for the first time in almost two years, boosting concerns over the nation’s prospects for growth.  Moody’s Investors Service said the outlook for the U.S. debt grade is negative after President Barack Obama signed into law the plan to increase the U.S. debt limit while cutting spending.

"A barely expanding U.S. economy and its implications for the world are now at the forefront of investors’ minds, helping gold push to records," said Edel Tully, London-based analyst at UBS AG, in a report. "Neither European nor U.S. debt issues have been comprehensively dealt with. Data since last Friday have increased expectations for further quantitative easing" by the Federal Reserve, she said.

"The U.S. economy isn’t doing well and the European debt problem is a long-term problem, which should drive prices to $1,800 by the end of the year," Hou Shufeng, an analyst at China Merchants Futures Co., said from Shenzhen.

In the euro zone, Italian and Spanish bond yields rose to euro-era record and reached levels widely viewed as unsustainable. "If you look at the European bond markets, you will see yields on Italian and Spanish bonds are back above 6 percent, so this crisis, unfortunately, seems to be spreading to Italy and Spain, which is also potentially more serious than Greece, because they're much larger," said Jesper Dannesboe, senior commodities strategist at Societe Generale. "Gold is reacting to this and that is the main driver right now."

The International Monetary Fund's monthly report on central bank reserves showed Thailand, Russia and Kazakhstan, among other countries, added to their gold reserves two months ago. This continues the trend of central banks diversifying into gold. Central banks will need to buy "several hundred" tons a year, said Eugen Weinberg, an analyst at Commerzbank AG.

(Sources: "Gold at Record as Debt Worries Mount; Central Banks Buy," CNBC, August 3, 2011; "Gold Rallies to Record for Second Day as Signs of Slowdown Fire Up Demand," Bloomberg, August 3, 2011)

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