Has Gold Turned the Corner?


This week was huge for gold, as it rallied $60 or so on the week from under $1670 to over $1730 USD per ounce. Please see the yellow line on the chart below from Kitco.com. There were a number of new developments contributing to its rise, and I believe that these items will be affecting the gold price for some time to come.

The first and most pronounced factor was the FOMC statement made this week. The Federal Reserve pledged to keep interest rates low until late 2014. The expectations prior to this FOMC meeting were to have the interest rates low until the middle of 2013. The Fed also formalized long term employment and inflation targets, which is something new. The markets understood these foci as indicating that the Fed is concerned about these factors, and that it will step in and “print money” to solve issues if they become obvious.(6) (7) (8) This theme is similar to the ECB making a “facility” to provide funding if countries have issues with refinancing their debt. (1) (2) (3) Other language used in investment circles to mean refinancing of government obligations is the idea of a “big bazooka” to sop up unwanted debt. (9) (10)

A second factor that has played on the price of gold this week is the oil deal between Iran and India, where India is paying Iran for oil with gold. This deal circumvents the US dollar as the medium of exchange, and all fiat currencies for that matter, in favour of using gold. Iran has also made a deal with Russia where each country is using their own currencies to trade oil. (11) Refer to my previous post entitled “Is the War in Iran Inevitable?” for more discussion on the deal. (4) (5)

A third factor playing on the price of gold come from the Euro zone, in particular the Greek credit talks. The markets more or less expect the issue to get resolved but the how and the when (and the how much of a hit will the bankers take) is what is yet to be determined. Strength in the Euro means weakness in the US dollar, which is bullish for gold. The resolution of uncertainty will give the Euro strength in the short term. The differentiator in the news this week is that the banks may actually have to write down part of their debt, which is new in that it may become formal rather than just being discussed. If this is how debt issues will get resolved in the future, expect more of these “haircuts” to be instigated. In this case, a haircut will be given to someone who has hair, and not the contrary.

It remains to be seen how long the momentum will last for the price of gold, but 2012 has been very positive thus far.

Sources:

1)      http://www.bloomberg.com/news/2012-01-17/greece-nearing-deal-with-private-creditors-marathon-ceo-says.html

2)      http://www.bloomberg.com/news/2012-01-18/imf-said-to-seek-1-trillion-boost-to-insulate-economies-from-euro-crisis.html

3)      http://www.bloomberg.com/news/2012-01-28/davos-leaders-urge-europe-to-resolve-crisis-threatening-the-global-economy.html

4)      http://www.debka.com/article/21673/

5)      https://joetheinvestor.wordpress.com/2012/01/24/is-a-war-with-iran-inevitable/

6)      http://wallstreetsectorselector.com/2012/01/fomc-statement-january-25th-2012/

7)      http://www.fxstreet.com/fundamental/analysis-reports/daily-global-commentary/2012/01/25/

8)      http://www.actionforex.com/action-insight/market-overview/weekly-review-and-outlook:-risk-appetite-jumped-after-fomc-but-lost-momentum,-could-it-survive-this-week%27s-data%3F-20120128158364/

9)      http://www.telegraph.co.uk/finance/financialcrisis/9019093/Eurozones-big-bazooka-bail-out-fund-is-left-in-tatters-by-SandP-downgrade.html

10)  http://www.economist.com/node/21534851

11)  http://www.resourceinvestor.com/2012/01/23/currency-wars-are-driving-gold-silver-higher

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About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

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