By by Ben Traynor
Thursday 2 June, 08:00 EDT
Price of Gold Rises, Stock Markets Fall As “Weak” Climate Means QE3 Still “On the Table”
THE U.S. DOLLAR gold price rose to $1544 per ounce Thursday morning – up 5.5% from May’s low – while stock markets, commodities and US Treasuries all fell after worse-than-expected US economic news and a further ratings downgrade for Greece.
“We are still of the opinion that the current advance will fizzle out ahead of its all-time high at $1577.60 in the days to come,” says Axel Rudolph, Commerzbank’s senior technical analyst, adding that the seasonal nature of gold price movements means the odds favor a retracement.
“While the metal holds above $1500 we should see fresh highs above record $1577,” counter technical analysts at bullion bank Scotia Mocatta.
“[However], the inability to make new highs will bring in sellers,” they warn.
Silver prices meantime bounced from an overnight low of $36.63 per ounce, hovering around $37.20 an ounce Thursday lunchtime in London.
“The current accommodative stance of US monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run,” said Fed vice chairman Janet Yellen in a speech in Tokyo on Thursday.
Monetary stimulus policies have “improved financial conditions and helped stimulate real economic activity,” added John Williams, president of the Federal Reserve Bank of San Francisco, in a separate speech a few hours earlier.
“I think that the current accommodative stance of monetary policy, with short-term interest rates close to zero, is appropriate and supports the [US Federal Reserve’s] dual mandate of stable prices and maximum employment,” said Federal Reserve Bank of Cleveland president Sandra Pianalto on Wednesday.
Pianalto added that she expects “inflation will be temporarily elevated this year”, but that it “will fall back below 2% in the next couple of years.
The policymakers’ comments came after Institute for Supply Management Manufacturing Index data for May showed a sharper-than-expected slowdown in manufacturing growth – dropping from 60.4 to 53.5 (a result below 50 indicates contraction).
“We all expected a slowdown. The business climate for manufacturing is starting to weaken,” said Cliff Waldman, economist at the Manufacturers Alliance/MAPI, a trade group.
“You don’t want to overstate one month, but this [slowdown] was a whopper.”
“The overall effect has been to keep QE3 [the potential third round of quantitative easing] on the table,” says a bullion dealer here in London.
“This should underline a buy dips outlook for gold”
Elsewhere in London, the Bank of England’s Paul Fisher told the Daily Mail newspaper on Wednesday that he “would consider” further quantitative easing if the UK economy “did take a sudden downturn”, adding that the Bank should wait for the UK to “get over this soft patch” before raising rates.
“Would it be right to increase interest rates and possibly risk running the economy into recession just so we could be more certain of keeping our credibility?” asked Fisher, who is a member of the Bank’s rate-setting Monetary Policy Committee.
In the Eurozone, meantime, ratings agency Moody’s further downgraded Greek sovereign debt on Wednesday, from B1 to Caa1. The new rating puts Greece on a par with Cuba.
“Around 50%of Caa1-rated sovereigns, non-financial corporate and financial institutions have consistently met their debt-service requirements. Around 50% have defaulted,” said a Moody’s statement.
“How much financial pressure can the EU take and when will the rest of the crippled countries come to the trough?” asks German precious metals group Heraeus.
Greece is currently negotiating inspectors from the EU, International Monetary Fund and European Central Bank over a medium term fiscal plan and possible additional financial assistance. The parties aim to conclude talks by Friday.
“The fresh paint covering the damage will create a short lived illusion…[but] gold and silver will continue to benefit from this situation for the foreseeable future,” says Heraeus.
Ben Traynor
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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.
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