Gold Has Tremendous Week as Political and Economic Woes Persist
After consolidating at around last week’s closing level in the early part of the week, the gold price took off on Wednesday. Precious metals in general reacted positively to the United States FOMC statement that the Fed would be holding a neutral interest rate policy over the next three years, and saying that it will keep interest rates between 0 and 0.25% through to the end of 2014. Market observers have analysed this as being tantamount to further quantitative easing and possibly inflationary.
This announcement, combined with lower than expected US GDP numbers on Friday helped the Dow Jones Industrial to post its first weekly decline this year, as gold burst through technical resistance on Wednesday and caught market bears on the hop. The move from $1650 to over $1700 in just a few minutes on the day of the FOMC announcement has been maintained through the latter half of the week, with cash gold closing at $1738.32, a rise of 4.3% since last Friday.
Wednesday’s price movement was the largest one-day gain since September 27 last year, when the ECB was close to recapitalising Europe’s banks. This time around, Greece is struggling to come to terms with its private creditors and talks that began the week so positively have stalled. Whilst these talks are continuing this weekend, Germany’s Angela Merkel has further muddied the waters with more unhelpful comments. In a statement she said that she sees a decreasing likelihood of Greece being saved from default, and that Germany is unlikely to sanction more of its money to help the failing nation after two years of bailouts and austerity measures have failed to cure its woes.
It looks increasingly possible that Greece will default on its debts – at least partially – and this could start the contagion that economists and market experts have been predicting for several months. If Greece goes, then attention will turn to Spain, Portugal, Italy and France, before extending further.
On top of these problems, the EU has placed sanctions on Iran. Imports of oil and petroleum products from the would-be nuclear power have been banned, and assets of its central bank frozen. The IMF has said that such actions could push the price of crude oil up by 20 to 30%.
In a further move, the IMF has lowered it forecast for global growth through 2012 from 4% to 3.3%, citing the problems in Europe, and impending recession within the Eurozone, as the reason. It released this forecast before the Greek talks stalled, and before Angela Merkel’s comments.
In the United States, company results are mixed. Technology stocks are, on the whole, faring well, whilst traditional industries are a little weaker, though Aerospace has been strong.
The first few weeks of the year may have set the tone for the remainder of 2012. Governments are indicating low interest rate policies, debt is set to remain at the forefront, and political problems persist. The global economy is turning south, whilst presidential aspirations in the United States may become more important than wider issues. With this backdrop, investors should expect gold to out-perform equities this year.
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