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Why Bad News in the World is Good News for Gold

The U.S. Comex gold futures have risen in five consecutive days, closing at $1,640.70 at the end of Tuesday. The gold futures surged 1.22 percent this week, and traded at a three-and-a-half months high. The S&P500 Index traded down 0.35 percent this week, although the level is approaching April’s high of 1,419. The Stoxx 50 Index rallied 0.97 percent this week, the Euro/Dollar Index rose 1.12 percent while the CRB Commodities Index surged 1.37 percent. The Dollar Index retreated about 2.49 percent from the recent high reached on 24 July to 81.907 as of Tuesday.

The risky external markets, commodities and gold are all having a tear. The sentiment on commodities has turned positive owing to traders’ expectations of further monetary easing in China, and better U.S. growth prospects. China’s Premier Wen said there would be room for more monetary operation, while the U.S. consumers’ confidence in August and July’s leading indicators both turned out better than expected.

Prices of the European stocks were further boosted by falling borrowing costs in Spain: the yield of the 12-month bill declined 85bp to 3.07 percent, while the yield of the 18-month bill fell 90bp to 3.34 percent compared to the level at the last sale. The market will also focus on Jean-Claude Juncker’s visit to Greece on the country’s request to extend the fiscal adjustment program by two years, as well as the Hollande-Merkel meeting on 23 August. The tone of these meetings will inform the market what to expect at the ECB meeting and the European Union Summit in September.

According to Bloomberg, investment holdings in gold have just reached an all-time high of 2,437.49 tons. Rising investment demand, and central bankers’ appetite for gold, estimated at 500 tons in 2012 by the World Gold Council, are the major positive factors supporting gold. On top of that, rising commodities prices will likely boost inflationary pressures, prompting investors to buy gold as an inflation hedge.

All eyes will be on the Fed’s July FOMC minutes to be released on 22 August to see how the doves and the hawks in the Fed are positioned, and what conditions are needed for QE3.

Robert Jilles
Sharps Pixley, London
www.sharpspixley.com

24 Aug 2012 | Categories: Gold

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