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Can Positive Factors for Gold Counter Possible Fed’s Disappointment?

The U.S. Comex gold futures retreated 0.76 percent, the Dollar Index rebounded 0.4 percent, and the S&P 500 index was flat while the Euro Stoxx 50 Index dropped 1.57 percent in the past two days.

The U.S. economic news has fared a bit better although news from Europe and Asia has been disconcerting. U.S. July consumer purchases gained 0.4 percent after falling in the past two months. The U.S. economy grew at an annual rate of 1.7 percent in Q2. Consumer spending also rose 1.7 percent and savings rate reached 4 percent from 3.6 percent in Q1. The August confidence report in the Euro area shows that manufacturers, services and consumer sentiments have continued to weaken. Economic contraction in Europe contributed to a substantial decline in exports from China to the EU, down 16.2 percent year-on-year in July. Japan’s prices continued to fall while South Korea’s industrial production fell for a second month, reflecting weak external demand.

From the recent trough on 16 May at $1,536.60, gold futures rebounded 7.7 percent as central banks increasingly discussed more economic stimulus measures. The July FOMC minutes released on 22 August gave gold price a push. Several members favoured more monetary easing especially given unemployment rate is still stuck at above 8 percent while recovery has been slow. As pointed out by Bill Gross of PIMCO, the largest bond investor in the world, the Fed has a dual mandate of keeping price stable and maximizing employment, hence quantitative easing should be in the cards.

Gold traders from Asia to Europe have turned cautious before the speech on Friday by Bernanke. The Fed may refrain from giving the timing of a QE3 at his speech although traders expect him to sustain the market’s expectations of further quantitative easing. Given that the central banks tend to buy gold on dips, and investors now own 78.99 million ounces of gold via ETPs, the third largest gold reserves in the world, gold price will see some support even though the Fed may disappoint in his speech.

Next week, the market will likely focus on the China’s August PMI Index on 1 September, the ECB meeting, the U.K. interest rate decision and the Merkel and Rajoy discussions on the Spanish aid on 6 September.

Robert Jilles
Sharps Pixley, London
www.sharpspixley.com

31 Aug 2012 | Categories: Gold

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