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Weaker Economic Data Seen Supporting Stimulus

Release Date: 
Saturday, February 23, 2013

Gold fell this week, but saw support Thursday and Friday on poor U.S. economic data and bargain hunting by gold buyers in Asia.  Gold was $28.60 lower this week, settling at $1,582.50 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $1.04 lower, closing at $28.86 per ounce.

St. Louis Fed president James Bullard said on Friday that the Fed will maintain its loose monetary policy while despite increasing signs of concern among policymakers about the potential costs of asset buying.

Fed minutes released on Wednesday showed members were divided over the direction of monetary policy.  Thursday's economic reports on factory activity and jobless claims pointed to a very slow recovery. Initial jobless claims increased by 20,000 to a seasonally adjusted 362,000 the week ended Feb. 16, the Labor Department said, higher than economists’ expectation of 350,000.  "Labor markets have probably improved marginally over the last six months, but there has been no dramatic strengthening," Stephen Stanley, an economist at Pierpont Securities, said.

The Federal Reserve Bank of Philadelphia’s gauge of regional manufacturing activity fell to negative 12.5 in February from negative 5.8 in January.  Markit, a financial information services company, also said its manufacturing activity gauge showed slower expansion.

These reports point to a slow recovery, suggesting the Federal Reserve may be more likely to continue its monthly purchases of $85 million in bonds to stimulate growth. In minutes from the central bank's January meeting, officials said "the recovery in the labor market was far from complete.” 

Tyche Group associate director Martin Hennecke said that he believes gold’s recent losses present a buying opportunity.  Hennecke believes the markets were spooked by the recent G 20 countries’ pledge not to engage in competitive devaluation of their currencies, the Fed minutes suggesting a possible reduction in monetary easing, and gold sales by notable investors in the last quarter of 2012.

According to Hennecke, despite the central banks’ statements, the reality is the debt position of many countries remains as weak as ever.  He believes that they will continue to print money to devalue their currencies in order to control debt.  “They have no choice but to print,” he said. “I think there will be upside [for gold] as people come to realize that the crisis isn’t over.”

“Economic problems haven’t gone away and they won’t go away anytime soon,” agreed Gavid Wendt, director at Mine Life Pty in Sydney. “People are looking for whether the economy is standing on its own two feet, and what is the Fed doing in terms of pulling back” [or not pulling back, from stimulus measures].

Despite gold’s recent pullback, “there are still plenty of people who are bullish long term,” agreed Mitsui Precious Metals analyst David Jollie.

Gold's recent declines have lured opportunistic buyers from India and China, the world's top bullion consumers, back into the market, said Barclays' metals analyst Suki Cooper.  Gold buyers in India are benefiting from a stronger rupee, which has made gold prices even cheaper in domestic currency terms for Indian jewelers and consumers.  "Buying in China has also returned to the market in force," Ms. Cooper said in a note to clients.

UBS commented, “this week…investors in China return with a strong desire to pick up metal at cheaper prices, with turnover on the [Shanghai Gold Exchange] surging to an all-time high.”  Physical buying in Asia supported gold in early trading after traders in China returned from a weeklong holiday.

 “[Gold’s] very cheap,” said David Lennox, resource analyst at Fat Prophets. “The U.S. has still got to deal with budgetary and debt constraints, they’re not going to go away.  While that’s still there, we think there’s opportunity for gold to rally robustly.”

Michael Power, investment strategist at Investec Asset Management, said “the Western way of looking at gold is no longer correct…and indeed hasn’t been correct for many years. There are two other dimensions to gold of growing importance and, collectively, of more importance than investment – jewelry and central bank demand.”  China’s and India’s consumption of gold is now well over 50% of global mine production, he noted.

CD Funds Principal Willem Middelkoop commented, “there was a very interesting report published recently in Beijing, in China, January 11, by a think tank of central bankers, and they were very candid. They say, for example, ‘China may announce a rise in gold reserves as a result of accumulation over reasonably long periods at a time it makes sense for the Chinese authorities.’”

“This report states that it is the plan of the Chinese... actually they say the Chinese have a three-phase 10-year route map to make the yuan a full reserve currency,” Mr. Middelkoop continued. The Chinese want to make the yuan, besides the dollar and the euro, an international reserve currency. They have a plan for this, to build this in the next 10 years, and gold will be a central part of their strategy…Central banks have tried to get rid of gold totally out of this monetary system in the last 20 or 30 years but they failed miserably, and now the dollar is in crisis and the euro is in crisis - you see central banks also diversifying into gold. When investors see that even central banks are buying back gold again, they also start to accumulate gold. And this report from the central bank think tank states that this development will continue and central banks and private investors will keep accumulating gold.”

(Sources:  “Gold, Silver Creep Lower Amid Investor Trepidation,” Wall Street Journal, February 22, 2013; “PRECIOUS-Gold pares gains, stays on track for second weekly loss,” CNBC, February 22, 2013; “Gold ends at seven-month low, down 2.3% on week,” Marketwatch, February 22, 2013; “Jobless Claims Increase,” Wall Street Journal, February 21, 2013; “PRECIOUS-Gold up as data boosts Fed stimulus hope after drop,” Reuters, February 21, 2013; “PRECIOUS-Gold rebounds after Fed worries sink price to 7-month low,” Reuters, February 21, 2013; Gold futures score first gain in six sessions,” Marketwatch, February 20, 2013; “Gold Snaps Five-Day Losing Streak Amid Fed Stimulus Speculation,” Bloomberg, February 20, 2013; “PRECIOUS-Gold drops to six-month low ahead of FOMC minutes,” Reuters, February 20, 2013; “Gold tumbles, losses build moving into U.S. open,” Marketwatch, February 20, 2013; “PRECIOUS-Gold inches up on Asia demand; firm dollar caps gains,” Reuters, February 19, 2013; “Gold futures inch further away from lows,” Bloomberg, February 19, 2013; “Gold futures inch further away from lows,” Marketwatch, February 19, 2013;  “Gold: Short term appearance versus long term reality,” Mineweb, February 18, 2013”)

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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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