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SHARPS PIXLEY Continued Cautious Tone Towards the World Economy and the Core Currencies Support Gold Prices

The U.S. Comex gold futures rebounded 0.25 percent to $1,660.80 on Tuesday after falling 1.80 percent last week. The S&P 500 index has risen 0.32 percent this week and 5.73 percent this year. The Euro Stoxx 50 index rose 0.19 percent this week after rising 1.28 percent last week. The crude oil futures have increased every week in the past seven weeks, rising 15.5 percent from the recent low of $84.44 in November last year. The Dollar Index has declined 0.23 percent this week while the Euro/Dollar has surged to a 14-month high at 1.3492 on Tuesday. The U.S. 10-year government bond yield briefly breached 2 percent on Monday.

Equities and High Yield Shine Despite Cautious Tone towards the Economy
The executives at the World Economic Forum at Davos last week were cautiously optimistic about the world economy despite the fact that the S&P 500 index is just 3.66 percent below its 2007 peak of 1,565.15 while the Dow Jones Industrial Average has surged to a five-year high. The December U.S. durable goods order rose 4.6 percent compared to the expectation of 2 percent. Corporate earnings in the U.S. have continued to beat expectations. The 10-year Spanish government bond yield has dropped 250bp since the peak reached in July 2012. Global junk bond yields have continued to decline. On the other hand, the consumer confidence in the U.S. declined more than expected in January to 58.6 from 66.7 in December, reflecting the impact of the higher payroll taxes. The economies of Japan, Europe and the U.K are still shrinking. Policy makers’ caution towards the economy suggests that the stimulus measures are unlikely to be taken away anytime soon, which will support gold prices.

Central Bank Keeps Buying Gold While Investors Sell ETFs
Bloomberg reported that the gold-backed ETP holdings fell 22 metric tons from the 20 December peak to 2,610.272 metric tons on 27 January. As the economy recovers, investors’ appetite for gold may have decreased. On the other hand, according to GFMS, the world central banks bought 536 metric tons of gold in 2012, the largest increase since 1964. The IMF reported that Russia’s gold reserves rose 2.1 percent in December and 8.7 percent in 2012. Kazakhstan’s gold reserves jumped 1.7 percent in December and a whopping 41% in 2012. Turkey’s gold holdings rose 84% as domestic banks deposited gold at the central banks. Given that the sovereign debt crises are still haunting the U.S. and Europe, central banks in emerging countries will continue to add gold on top of the traditional reserve currencies.

Kelly Smith
Sharps Pixley, London

30 Jan 2013 | Categories: Gold

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