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Wednesday, August 31, 2011

UBS reaffirmed its one-month gold price target of $1,950 per ounce

The gold price climbed 2.4% Wednesday morning to $1,832 per ounce on the back of expectations that the weakening economy would prompt the Federal Reserve to initiate more monetary stimulus. After trading as low as $1,783 early Tuesday, the price of gold soared following a CNBC interview with Chicago Fed President Charles Evans. The dovish voting member of the Federal Open Market Committee told CNBC’s Steve Liesman, “the data has been soft” and noted that he “would favor more accommodation.”

In light of last week’s plunge and subsequent rebound in gold, UBS wrote in a note to clients that “the mood among gold investors appears to be to buy the dip rather than chase the market, which is understandable given last week’s volatility.”

The firm went on to say that the “violent sell-off hasn’t done any lasting damage to gold, and the reasons investors bought gold in recent months remain valid.”

As a result, UBS reaffirmed its one-month gold price target of $1,950 per ounce and its three-month forecast of $2,100 per ounce.

Tuesday, August 30, 2011

Corrections in gold prices can be swift and violent

The gold price dipped Tuesday morning, trading lower by $18.78 at $1,793 per ounce. Volatility in the price of gold has surged in recent days. After hitting yet another all-time high early last week, the gold price posted its first weekly loss since mid-June.

Goldman Sachs’ chief U.S. economist, Jan Hatzius, characterized Bernanke’s speech as “anti-climactic” and offering “little guidance on the near-term policy outlook.” However, “Bernanke’s remarks contained a short passage on the prospect for additional monetary stimulus. He reiterated that the committee ‘has a range of tools’, and that it discussed the costs and benefits of those options at the August FOMC meeting.”

Hatzius noted that by the Fed extending the next FOMC meeting in September from one to two days, it “makes easing at this meeting a bit more likely than before.” He forecasted that “We continue to think that further easing via manipulation of the Fed’s balance sheet —either through expansion or restructuring of the average duration of holdings—is likely by early 2012.”

Although the Goldman economist did not discuss the impact of further Fed easing and/or QE3 on the financial markets, the implications for the gold price are quite clear. Additional rounds of money printing by the U.S. central bank are likely to lead to greater investment demand for the one form of currency that is no individual’s debt and cannot be debased with the click of a mouse.

Despite the long-term positive macro-economic backdrop, corrections in gold prices can be swift and violent. Last week’s decline in gold may have ushered in a period of choppy price action as the yellow metal registered its first significant decline, over 10% from top to bottom, since early 2010.

Saturday, August 27, 2011

Fed Chairman did not make any mention of QE3

Gold reclaimed the $1,800 per ounce level Friday afternoon as the majority of the commodities complex rebounded from earlier weakness. COMEX gold futures, per the December contract, initially slid toward $1,765 following release of Ben Bernanke’s speech after the Fed Chairman did not make any mention of QE3. However, gold quickly bounced back, reaching an intra-day high of $1,812.60 per ounce at approximately 2:30pm ET and holding onto the majority of its gains later this afternoon.

Goldman analyst noted that a further decline in interest rates from QE3 is unlikely to have “a significantly positive effect” on U.S. housing conditions, which is critical to generating a more sustainable economic recovery. He based this on “the large amount of unoccupied inventory that currently hangs over the market” and households’ inability to extract equity from their homes to help fuel consumer spending. In addition, QE3 would likely lead to higher food and energy prices, further curtailing economic growth.

Although Stehn did not discuss the specific implications of QE3 for the gold price, they would likely be quite positive. The inherent currency debasement that stems from money printing is bullish for gold prices. Notwithstanding whether QE3 is announced or not, the recent flurry of soft economic data presents a positive macroeconomic backdrop for gold prices. Policymakers will likely engage in further Keynesian stimulus measures, an outcome which would be music to the ears of those bullish on the gold price.

Friday, August 26, 2011

we remain bullish on the price of goldas long as the motivating factors of fear and uncertainty surrounding the world’s economies and monetary systems

The gold price fell again on Thursday, sinking $28.75 to $1,730.50 per ounce. The price of gold fell as low as $1,704, however rebound back to $1,763.20 Friday morning – from lowest $1,704 is a level that is 10.9% off the $1,913 high posted earlier this week. Heavy liquidation of COMEX gold futures weighed on the yellow metal.

The Dundee strategist noted that over the past six and a half years, on average approximately 44% of the gains made during rallies “have been eroded in subsequent corrective periods.” As for the duration of the gold price corrections, they have lasted approximately 42% as many weeks as the prior rally.

The most recent gold price advance totaled $395 from July 1 to August 22. Based on the average historical data, Burchell determined that the current correction in the price of gold would take the yellow metal to approximately $1,700 per ounce over the course of three weeks. In a more extreme scenario, the gold price could fall to $1,625 per ounce within a five-week timeframe.

Over the longer-term, however, the Dundee strategist reiterated his bullish stance. “As we have stated many times in the past, we remain bullish on the price of gold, and expect bullion to continue its upward trek (and defy gravity) as long as the motivating factors of fear and uncertainty surrounding the world’s economies and monetary systems continue,” he wrote. “In fact, we would be so bold as to suggest the party (for gold bugs, at least) won’t end until real interest rates turn sharply positive.”

Thursday, August 25, 2011

CME Group announced another increase in margin requirements to trade gold

Gold turned sharply lower Thursday morning as risk aversion continued to subside in financial markets. CME Group announced another increase in margin requirements to trade gold after the market close on Wednesday. The exchange raised initial margin requirements rose to $9,450 from $7,425 per 100-ounce contract, and maintenance margin requirements to $7,000 from $5,500. The margin increases go into effect as of the close of trading on Thursday. CME last raised gold margin requirements two weeks ago. This factor contributing to the decline in the gold price below $1,800 per ounce.

TD Securities went on to say that “A shake out in the bull trend would not be entirely unexpected even if a move lower from current levels would fall a little short of the mid $1,900 area we had thought reachable as part of this move. But this market has priors and the lesson of the last few months is that corrections tend to shallow and short-lived.”

If a meaningful gold price correction ensues, the firm forecasted that “there will be good support in the $1,800/$1,810 area but below here, the market may drop back to the $1,700/$1,750 area.” Lastly, it stated that “We would need a lot more evidence – and subsequent confirmation – to call a technical end to this rally at the moment.”

Wednesday, August 24, 2011

Gold price traded lowerafter the Shanghai Gold Exchange hiked margins to 12%

The gold price traded lower on Tuesday, sinking $14.50 to $1,883 per ounce, after the Shanghai Gold Exchange hiked margins to 12%. Gold price turned lower following the news out of China after hitting a new all-time high of $1,913 overnight.

On Monday, the gold price passed $1,900 per ounce for the first time on its way to yet another series of new record highs. COMEX gold futures, per the December contract, reached a new high of $1,917.90 per ounce Monday evening. The spot price of gold climbed to fresh all-time highs on the back of speculation that Fed Chairman Bernanke was contemplating a third round of quantitative easing (QE3).

The recent deterioration in economic data and worries over a double-dip recession has led investors to increase their allocations to gold and investments tied to the gold price. The SPDR Gold Trust (GLD) – a proxy for the price of gold and the largest gold exchange-traded fund (ETF) – eclipsed the SPDR S&P 500 ETF (SPY) to become the world’s largest ETF, based on net assets.

Strength in the gold price has sparked a broad-based rally in precious metals with silver climbing 1.9% yesterday. However, silver price moved lower Tuesday morning, declining $0.77 to $42.98 per ounce. Despite today’s weakness, gold’s sister precious metal remains perched near 3-month highs. Platinum, whose nominal price was surpassed by gold last week for the first time since 2008, retook the lead from the yellow metal by advancing $28.50, or 1.3%, to a three-year high of $1,903.40 per ounce.

Tuesday, August 23, 2011

QE3 will push Gold price to USD2,000 per ounce

The gold price touched a new all-time high of $1910 per ounce early Tuesday! The price of gold rallied alongside the broader stock and commodity markets as expectations of a fresh round of quantitative easing made the rounds on trading desks across Wall Street. WTI crude oil gained 1% to $83.10 per barrel, boosted by weakness in the U.S. dollar. Silver futures rallied 1.4% to $43.00 per ounce.

Bill Fleckenstein – another well-respected investor who has been bullish on the gold price for many years – echoed Faber’s comments on Friday. Writing on, Fleckenstein said that the combination of deteriorating economic conditions in the U.S. and Europe “have to weigh heavily on Ben Bernanke’s mind…the pressure to fire up the printing presses must be intense, for both Bernanke and Trichet.”

Flecksenstein went on to say that “If the current rout in the world’s bank stocks and stock markets continue, and I don’t see any reason why it won’t, I would expect a round of massive, coordinated QE on the part of the world’s central banks sometime soon – as in perhaps by Tuesday morning.” QE3 will push Gold price to USD2,000 per ounce.

Monday, August 22, 2011

Singapore Gold Price Hits SG65 per gram

Singapore gold price hits SG65 per gram. History high price.

Saturday, August 20, 2011

For the week, the gold climbed 6.4%

The gold price soared to a new series of record highs on Friday as sovereign debt and recession worries continue to pressure Wall Street. The spot price of gold climbed as much as $54.98 to $1,878.90, a new all-time high, before paring its gains prior to the open of U.S. equity markets. The SPDR Gold Trust (GLD), the most liquid gold price proxy in the equity markets, surged $2.58 to $180.30 per share in pre-market activity. COMEX gold futures, per the December contract, hit a new record of $1,881.40 per ounce earlier this morning.

For the week, the gold climbed 6.4%. In doing so, gold extended its weekly win streak to seven – the longest stretch since April 2007. Year-to-date, the price of gold is now higher by 30.3% and on pace for its 11th consecutive annual advance.

Tom Pawlicki, an analyst with MF Global said in a Bloomberg interview that “Lack of confidence in the global economy is pushing people towards gold. Gold will continue to advance unless leaders are able to resolve the European or U.S. debt crisis.”

Friday, August 19, 2011

Gold Price Hits USD1,820

The gold price surged to fresh all-time highs Friday morning as risk aversion gripped financial markets across the globe. The spot price of gold rallied as much as $31.55 to $1,822.60 per ounce, eclipsing last week’s record high of $1,815.00. COMEX gold futures, per the December contract, reached a new high of $1,824.20 per ounce as of 9:15am ET.

The rout in financial markets continued as trading progressed Thursday morning, with the Dow Jones Industrial Average (DJIA) plunging over 500 points and gold reaching a new set of all-time highs. The gold price added to its gains this morning after weekly U.S. jobless claims came in at 408,000, above the consensus estimate among economists of 400,000. The prior week was revised from 395,000 to 399,000, while continuing claims rose to 3.702 million from 3.695 million. The disappointing employment data, coupled with a wave of worrisome reports in recent weeks, reinforced the view that the U.S. economy may be nearing a new recession.

Thursday, August 18, 2011

The price of gold showed a muted reaction to the release of the Producer Price Index (PPI)

GOLD PRICE NEWS – The gold price, at $1,785 per ounce, traded near unchanged Wednesday following the news that producer prices rose more than anticipated. The price of gold showed a muted reaction to the release of the Producer Price Index (PPI), which rose 0.2% month over month and 7.2% year over year – both slightly hotter than a Bloomberg survey of economists. Commodities moved higher across the board with crude oil rising 1.5% to $87.99 per barrel and copper advancing 0.6% to $4.04 per pound. Silver rose above $40, climbing $0.15 to $40.05 per ounce.

The gold price supported its gains yesterday after German Chancellor Angela Merkel and French President Nicolas Sarkozy released a set of proposals designed to bring more fiscal unity to the euro zone. Although the proposals called for the creation of a Eurozone President and for each nation to adopt a balanced budget, the plan was quite short on details. Moreover, the proposals did not suggest specific measures to alleviate the PIIGS’ debt woes or to improve the outlook for their economies. These shortcomings left investors disappointed, reflected in the broader markets’ slide and the rally in the price of gold.

Wednesday, August 17, 2011

Gold will reach $2,000 per ounce in the coming months

The gold price advanced $16.50 to $1,783 per ounce Tuesday, spiking higher on the news that gross domestic product in the 17-nation Euro zone rose a mere 0.2%. The price of gold, which sank as lows as $1,728 per ounce early yesterday, climbed following the weak economic data out of Europe. Additional bond purchases from the European Central Bank are highly likely following Europe’s weakest GDP figure since the global economy was mired in a recession in 2009. The euro fell to 1.438 against the U.S. dollar on speculation that the ECB will cut interest rates at its next policy meeting.

As for the Fed’s response to the downturn in the economy, Lockhart stated that “If additional actions are required, I can assure you the Federal Reserve is not out of bullets. Expansion of the balance sheet or changes in the composition of the Fed’s asset portfolio are available, in my view. These could be quite effective, particularly if done in sufficient size, in the event that the economy retreats back into contractionary territory.”

Although Lockhart did not specify the potential size of any expansion to the Fed’s balance sheet, such a measure would likely result in a third round of quantitative easing (QE3) and be quite beneficial to the price of gold.

The gold price also received a boost from TD Securities, which reiterated its longer-term positive outlook on the yellow metal. In a note to clients, the firm predicted that the price of gold will reach $2,000 per ounce in the coming months.

Tuesday, August 16, 2011

Gold pushing higher into 2012

After two weeks of successive declines, open interest staged a marginal recovering, with 3.0 tonnes added in the past week. Gold open interest on COMEX now stands at 1,665.7 tonnes, persistently below last year’s average of 1,787 tonnes. However, prices gained a further 5.0% w/w on concerns over the fiscal situations and faltering economies in the US and Eurozone.

Net speculative length fell for the first time in four weeks, losing a significant 96.7 tonnes. The net speculative position for gold now stands at 933.5 tonnes — off last week’s high for the year of 1,028 tonnes. This decline was mostly attributable to a shedding of 94.6 tonnes in speculative longs, with a marginal increase of 2.1 tonnes in speculative shorts subtracting further from the net position.

The strong drop-off in speculative longs points to a market running out of momentum. And, although currently at 100.2 tonnes, speculative shorts are not too far from last year’s average of 90.7 tonnes, we remain wary of sentiment changing. With speculative long positions totalling 933.4 tonnes, gold looks vulnerable, which could see some price weakness in the near term. Our short-term view on gold remains neutral.

After the strong build-up of the last month, ETF holdings of gold decreased, albeit marginally, by 3.6 tonnes. This wavering investor confidence confirms our neutral tactical stance on gold. Our strategic view remains unchanged: we foresee gold pushing higher into 2012.

Saturday, August 13, 2011

Gold price is likely to remain well supported

The gold price moved lower closing this week with, falling $14.05 to $1,7460 per ounce. Risk appetites rebounded, sending the price of gold moved to the downside and global stock markets broadly higher. The European Stoxx 600 climbed over 2%. Gold prices advanced after initially falling on the news that France, Italy, Spain and Belgium would temporarily ban short-selling on select stocks in order to calm volatility.

The better than expected data marked a noteworthy change from a plethora of disappointing economic reports in recent months. The worsening economic backdrop has fueled calls for the Federal Reserve to launch a third round of quantitative easing (QE3) to provide further monetary stimulus to the struggling economy. These calls have, in turn, helped lift gold prices to a series of new all-time highs in recent weeks.

While the latest jobless claims data provided a breath of fresh air, it will take several more positive reports to mark a change in the economy’s downward trend. Until such a development occurs, the gold price is likely to remain well supported, notwithstanding sharp corrections as witnessed yesterday.

Friday, August 12, 2011

Gold will reach $2,000 per ounce by 2012

The gold price dove Friday morning after the CME Group raised margins on gold futures contracts by 22%. The price of gold traded to a new all-time high of $1,815 per ounce overnight before falling back to $1,756. Initial margin will climb from $6,075 to $7,425 and variation margin – for hedging purposes – will move up to $5,500 from $4,500. The move by CME led to liquidation in electronic trading on the COMEX.

Gold will reach $2,000 per ounce by 2012, but there is a “high probability” of an eventual bubble in the yellow metal, according to Deutsche Bank.

In its latest outlook on the gold market, Deutsche Bank wrote that “We believe the main beneficiary of super low interest rates in the United States, a weak U.S. dollar, a view that central bank holdings in the U.S. dollar are still excessive and ongoing questions over the stability of the financial system will be gold.”

With regard to the potential for a gold bubble, the firm cautioned that a “high probability” exists that a bubble may be developing in the gold market. Deutsche Bank’s assertion was based on the recent tendency by investors to acquire positions in gold when the U.S. dollar is both rising and falling, and to buy gold as a hedge against inflation and deflation.

Thursday, August 11, 2011

Gold surpassed $1,800 for the first time ever

Earlier today, the Gold surpassed $1,800 for the first time ever, on the way to its latest all-time high of $1,810.00 per ounce.

While gold rallied to a new record level, the broader U.S. equity markets extended their losses. The Dow Jones Industrial Average (DJIA) plunged 519.83 points, or 4.6%, to 10,719.64. This marked the second day this week that the Dow Jones fell more than 500 points, as widespread liquidation engulfed Wall Street.

Jim Steel, a precious metals analyst at HSBC, commented that “The (gold) market remains well bid and the downturn in the equity markets continues to show a lack of investor confidence.”

Wednesday, August 10, 2011

Gold has rallied over $100 in the past two days alone

Sparked by fears over a global economic slowdown, the gold price reached a new all-time high of $1,780 per ounce early Tuesday morning. The price of gold has rallied over $100 in the past two days alone as investors poured funds into the yellow metal and liquidated cyclically-sensitive stocks and commodities.

However, in early afternoon trading the gold price surrendered a significant portion of its gains, sliding back down to $1,725 per ounce. Weakness in the gold price coincided with a rebound in the broader equity and commodities markets as risk aversion subsided.

The broader U.S. equity markets staged a remarkable rally Tuesday afternoon following the Fed’s statement, as the Dow Jones Industrial Average (DJIA) surged higher to close up 429.92 points, or 4.0%, at 11,239.77.

The Dow initially fell by nearly 200 points after the release of the FOMC announcement, but quickly rebounded as very oversold conditions lead to short-covering and bargain hunting by traders.

With its 4.0% rally, the Dow posted its largest single-day gain in over two years.

Tuesday, August 9, 2011

Economic outlook are supportive of higher gold prices

The gold price soared to a new all-time high, touching $1,722.90 per ounce Tuesday morning. The price of gold advanced on the back of the United States being stripped of its AAA rating by S&P. The debt downgrade led to worries over the longer-term sustainability of the U.S. dollar as a reserve currency, prompting a flight to gold. Helping to amplify the trepidation among investors were fresh worries over contagion in Europe as Italian and Spanish debt came under heavy selling pressure.

In a note to clients, the Goldman economist wrote that “Even our new forecast is subject to meaningful downside risk. We now see a one-in-three risk of renewed recession, mostly concentrated in the next 6-9 months. There are three specific issues that concern us. First, a worsening of the European financial crisis, and a failure of European policymakers to respond adequately, could lead to a further tightening of financial conditions and credit availability, which would worsen the economic outlook globally. Second, our forecast assumes that the payroll tax cut—currently scheduled to expire at the end of 2011—is extended for another year, but if that failed to happen the fiscal drag in early 2012 would increase significantly. Third, increases in the US unemployment rate have historically had a tendency to feed on themselves, and this could happen again.”

While Hatzius did not specifically discuss the gold price, the implications of the firm’s revised economic outlook are supportive of higher gold prices. Although the firm did not suggest that a third round of quantitative easing is a certainty, it is clear that the odds of an eventual restart of the Fed’s quantitative easing campaign have increased substantially. Furthermore, Goldman’s forecast echoes recent predictions from a host of noted investors – including Marc Faber, Jim Rogers, Eric Sprott, and many others – that Chairman Bernanke and the Federal Reserve are prepared to fire up the printing presses for as long as necessary to combat the deflationary headwinds facing the U.S. economy. As long as deflation is enemy number one of central bankers, the gold price is likely to remain well supported.

Saturday, August 6, 2011

Better than expected jobs data had gold slip lower early morning

The gold price climbed $10.20 to $1,657.85 per ounce Friday morning, holding firm despite a stronger than expected jobs report in the United States. The Labor Department reported a gain of 117,000 nonfarm payrolls versus an estimate of 85,000 according to a Bloomberg survey of economists. The unemployment rate fell 0.1% to 9.1%. The weak jobs picture has been a key area of focus for the U.S. Federal Reserve. Tepid jobs data, notwithstanding this stronger than anticipated report, has been a key driver of rising speculation that Chairman Bernanke may be preparing for a third round of quantitative easing. Gold prices are advancing as traders and investors add to positions in the yellow metal via physical gold, gold futures, and exchange-traded funds backed by gold bullion.

“Gold opened higher this morning at 1660/1661. Better than expected jobs data had gold slip lower early morning but with investor confidence in the economy still soft Gold was bid up eventually reaching an intraday high of 1666.50/1667.50 mid session. As equities continued their morning selloff, profit taking in gold took the metal to an intraday low of 1648/1649 mid day. Choppy trading for the remainder of the session took gold to its close at 1649/1650.”

Friday, August 5, 2011

Gold price continued its record-setting run

The gold price continued its record-setting run Thursday, climbing to $1,678.50 per ounce before back to 1658 this Friday (Eastern Time). The price of gold soared despite broad-based strength in the U.S. dollar, which gained 4% versus the yen after intervention in the currency markets by the Bank of Japan. Concerns over the prospect of a double-dip recession in the U.S. have boosted the allure of gold and weighed heavily on global stock markets in recent weeks.

The gold price advanced to a new record high yesterday for the fifth day in eight trading sessions. The spot price 0f gold reached an intra-day high of $1,672.80 per ounce, boosted by ongoing economic worries in the United States and Europe. COMEX gold futures, per the December contract, hit a new all-time high of $1,675.90 per ounce.

Marc Faber, a long-time gold bull and editor of The Gloom, Boom and Doom Report, commented that ” I just calculated that if we take an average gold price of say around $350 in the 1980s and compare that to the average monetary base and the average U.S. government debt in the 1980s…and then if I compare this to the price of gold to today’s government debts and monetary base, gold hasn’t gone up at all. It’s actually gone against these monetary aggregates, and against debt it’s actually gone down. So I could make the case that gold is today probably very inexpensive.”

Over the past week, a key catalyst for the gold price rally has been the deterioration in U.S. economic data. In light of the recent stretch of worse than expected reports, on Wednesday J.P. Morgan lowered its growth outlook for the U.S. economy. The firm cut its GDP estimates to 1.5% from 2.5% in the third quarter of 2011; to 2.5% from 3.0% in the fourth quarter; and to 2.0% from 2.5% in the first half of 2012. In addition, J.P. Morgan is now forecasting that the Federal Reserve will not begin to raise interest rates until the middle of 2013, versus its previous estimate of the start of 2013.

Needless to say, a more dovish Federal Reserve and a longer period of negative real interest rates make the case for a higher gold price that much stronger.

Thursday, August 4, 2011

Launch a third round of quantitative easing (QE3) – and the better the gold price outlook becomes

The gold price soared to yet another record high early Wednesday, surging as much as $11.50 to $1,672.80 per ounce before backing off to trade just under the $1,660 level. The price of gold has gained $165, or 11%, since the end of the second quarter, bolstered by a slew of soft economic data in the U.S.

Investment demand for gold, silver, and other precious metals such as platinum and palladium, continues to rise while the appetite for conventional stocks falls. Even central banks have recognized the place precious metals should occupy in a portfolio, evidenced by this week’s news that the Bank of Korea recently purchased $1.24 billion of gold. The SPDR Gold Trust (GLD), a proxy for the gold price and the world’s largest gold ETF, traded to a record high early Wednesday, rising $0.00 to $162.00 per share. COMEX gold futures, per the December contract, reached a fresh record high of $1,675.90 per ounce.

Yesterday’s gold price rally and weakness in the broader markets followed the latest in a series of disappointing reports on the status of the U.S. economy. Personal spending for June fell 0.2%, below the 0.1% increase expected by economists. This marked the third straight trading day of worse than expected economic data – following Monday’s ISM report and last Friday’s GDP data. The worse the economy becomes, the more pressure is likely to build on the Federal Reserve and Chairman Bernanke to launch a third round of quantitative easing (QE3) – and the better the gold price outlook becomes.

Wednesday, August 3, 2011

Support for the economy is now likely to turn back to the Federal Reserve and Chairman Ben Bernanke for QE3

The gold price soared to yet another all-time high Wednesday morning, rising $37.09 to $1,640.80 per ounce. The price of gold dipped briefly following the deal to raise the debt ceiling, but quickly bounced back amid concerns that the United States would lose its AAA credit rating. Helping to further boost gold prices was a fresh batch of economic data showing the U.S. economy was slowing materially.

With few fiscal stimulus options likely, support for the economy is now likely to turn back to the Federal Reserve and Chairman Ben Bernanke for QE3. While the Fed’s second round of quantitative easing (QE2) ended in June, calls for QE3 have escalated in recent weeks.

Bernanke and his fellow central bankers undoubtedly paid close attention to Monday’s ISM data, and will be keeping a close eye on Friday’s non-farm payrolls report. The next Federal Open Market Committee (FOMC) meeting will be held next Tuesday August 9 and although most economists and investors do not expect the Fed to launch QE3 at that time, a more dovish tone is expected from the policy statement.

This trend has been reflected in recent weeks by the rising gold price, which is signaling that the Fed is expected to maintain near-zero interest rates for the foreseeable future. In recent weeks, the Fed Fund futures market has pushed out the chances of a rate hike from mid 2012 to 2013. With real interest rates remaining firmly in negative territory for the foreseeable future, the price of gold is likely to remain well supported.

Tuesday, August 2, 2011

Gold remains the universal thermometer of global worries

The gold price declined Monday morning as a deal was finally struck between President Obama and House Republicans to raise the debt ceiling. When the news broke last yesterday, gold prices spiked as low as $1,607 per ounce. Stocks and cyclical commodities, such as oil, rallied on the announcement of a deal. Investors and traders who purchased gold as an insurance policy against a debt default liquidated positions. However, the price of gold rebounded back to $1,629 Tuesday morning on lingering worries over the possibility of a credit rating downgrade. Whether the debt ceiling agreement went far enough to address the long-term fiscal issues facing the United States was being hotly debated Monday morning.

“Gold remains the universal thermometer of global worries; and its strength in the face of a firming dollar, is highlighting a bad global financial fever. Topically, there is a very strong correlation between gold and debt levels. We continue to like gold and the gold equities as hedges against uncertainty. Our commodity team is forecasting $1,800/oz for Q4 2011….Gold is likely to continue to benefit from US and European financial uncertainty. With two of the world’s largest currencies tainted, it’s impossible to know when fears (and gold) will subside.”

The above commentary came from a report last week by J.P. Morgan’s Global Commodities Analyst Michael Jansen.

In light of his bullish outlook for gold, J.P. Morgan’s North American equity derivatives team released a note to clients on Monday with an options trading idea to capitalize on higher gold prices.

“Investors who agree that gold is likely to be a good hedge against uncertainty should consider buying the October expiry $163-$177 call spread on Gold, specifically buying the $163 (~3% OTM (out-of-the-money)) calls and selling the $177 (~12% OTM) calls,” according to the firm.

“This trade can be entered into for a net cost of $2.71 (~1.7% of spot). The maximum loss for this trade is the premium paid of $2.71 and the maximum gain for this trade is $11.29.”

J.P. Morgan went on to note that “To determine the maturity we looked at implied volatility percentiles for ATM (at-the-money) out to 5% out-of-money in increments of one percent for August, September, and October expiries over the past three years and found that implied volatilities are in their lowest percentiles for October expiry.”

“Therefore, we like buying the October expiry $163 strike calls. The call spread offers payoff-to premium ratio of ~5 to 1. In addition, the 3-month 100-110 skew is ~1.5% which over the past one year is in its 70th percentile and fairly expensive in our view.”

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