US Interest Rates Should Support Gold Price

By: Ben_Traynor

WHOLESALE MARKET gold prices dropped to below $1680 an ounce Wednesday morning – 1% down on their high for the week – after failing a day earlier to break the $1700 barrier.

Silver prices drifted below $32.50 per ounce – a 2.3% drop from Tuesday's peak – while stocks and commodities traded sideways and US Treasuries ticked lower.

Oil prices eased slightly after the French energy minister said France "is favorable to the suggestion" that the US and UK could release strategic oil stocks in an effort to lower the spot price of oil.

US policymakers meantime should not be complacent that recent signs of recovery will continue, US Federal Reserve chairman Ben Bernanke said in a US television interview Tuesday.

"We haven't quite yet got to the point where we can be completely confident that we're on a track to full recovery," Bernanke said.

"It's far too early to declare victory."

On Monday, Bernanke said that "continued accommodative policies" were needed to support the US labor market. Stock markets rallied immediately following those comments on Monday, as did gold prices.

"Our economists believe that the market has been too aggressive in pricing in Fed rate hikes in 2013, while the Fed is more likely to push the hikes out to 2014 as indicated by [Monday's] speech [by Bernanke]," says a note from Barclays Capital.

"We believe low interest rates and longer-term inflationary pressures should remain supportive for gold prices."

Goldman Sachs meantime has reiterated its 12 month gold price forecast of $1940 per ounce. By contrast, precious metals consultancy CPM Group has said it does not expect gold to set new highs this year.

Here in Europe, the Eurozone crisis "is almost over", Italian prime minister Mario Monti said Wednesday.

"Things have stabilized in Europe," concedes Glenn Levine, Sydney-based senior economist at Moody's Analytics, "and it's in their interest to be optimistic but the muddle-through is still on... anyone who pretends to know if we are out of the woods yet is clearly kidding themselves or misleading their audience."

Here in the UK, the economy shrank by more than previously through in the fourth quarter of last year, according to revised figures published Wednesday. Q4 GDP fell 0.3% from the previous quarter, compared to the previously reported 0.2% fall, according to the Office for National Statistics release.

By comparison, revised US GDP figures due out tomorrow are expected to confirm the American economy grew in Q4.

"Why is their recovery better than ours?" asked Bank of England Monetary Policy Committee member Adam Posen in a speech of that title on Tuesday.

Posen, who has voted for more quantitative easing at fifteen of the last eighteen MPC meetings, went on to cite differences in government fiscal tightening as one factor that explains "a sizeable share of the growth differential between the US and UK."

Over in India, finance minister Pranab Mukherjee said Tuesday he will not reverse the recent rise in import duties. Many Indian gold dealers have closed in protest and remain on strike.

"Until the Indian jewelers reopen their shops, Indian gold demand will remain weak," says a note from HSBC.

"The dip in Indian demand may be partly offset by better Chinese physical demand as Shanghai premiums [over Spot Gold] remain high."

In China meantime, after India the world's second-largest gold consumer, stock markets saw their biggest falls in four months Wednesday, Bloomberg Businessweek reports.

The falls came after the country's largest copper producer, Jiangxi Copper, reported an 18% drop in earnings and investment bank Societe Generale said consensus estimates for Chinese companies were "far too optimistic".

"Investors had expected earnings to be weak but they are still below expectations," says Larry Wan, head of investment at Union Life Asset Management in Beijing, which manages over $2 billion worth of assets.

"Moreover, shares have already risen quite a bit this year on monetary easing expectations."

March sales by the US Mint of gold American Eagle bullion coins – produced explicitly for gold investment purposes – are already more than double the total for February. However, the nearly 1.4 tonnes sold represents a 40% drop on the March 2011 figure, and looks set to be the lowest March total since 2007.

Sales of silver bullion American Eagles meantime have breached the 10 million ounce mark, equivalent to 311 tonnes. By comparison, the US Mint sold 12.4 million ounces in the first three months of 2011.

By Ben Traynor
BullionVault.com

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.(c) BullionVault 2012

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