Though recent movement has tracked currency fluctuations, geopolitical tensions remained a key driver for the price of Gold this week. Lately, Gold prices in the short-term have become more sensitive to moves in the euro/dollar exchange rate. According to one precious metals analyst, “Significant macroeconomic and geopolitical risk and the appalling fiscal state of most major industrial nations means that Gold will almost certainly eke out further gains in all currencies in the coming months.” In a recent letter to investors, noted billionaire hedge fund manager John Paulson said, “By the time inflation becomes evident, Gold will probably have moved, which implies that now is the time to build a position in Gold.”
According to the World Gold Council’s annual report, the demand for Gold reached an all-time high in 2011, largely due to increased buying in China, India and Europe. Marcus Grubb, managing director for investment at the World Gold Council, said, “It is likely that China will emerge as the largest gold market in the world for the first time in 2012. What is certain is that the long-term fundamentals for gold remain strong, with a diverse and growing demand base, coupled with constrained supply side activity.” Another significant Gold-buying event covered in the report was the fact that in 2011, Gold purchases by central banks far exceeded purchases in 2010. In 2010, central banks bought 77 metric tons of the yellow metal. In 2011, they bought 440 metric tons, an increase of 471%.
All this week, true to form, as the chances of a Greek bailout improved, the dollar went down while pushing the value of the euro up. Greek lawmakers voted 199-74 at the beginning of the week to pass the austerity measures demanded by eurozone finance ministers. The city of Athens experienced violent protests and rioting in response to the austerity vote. Despite the passage of the measures, the mood in the eurozone was mostly negative, as many pointed to the fact that such measures had been previously agreed to, but were never implemented. The Financial Times reported that some European nations were considering only giving conditional approval for a bailout until they could be convinced that the latest austerity measures will be implemented fully.
Finance ministers in the eurozone canceled a meeting that had been originally scheduled for Wednesday in which they were to make a decision on Greece’s bailout. Instead, they held a conference call to discuss whether Greece’s leaders had made sufficient commitments with those measures. Greece’s finance minister accused critics of his country’s efforts of “playing with fire” and promised that all outstanding issues on the measures would be addressed. Despite all the skepticism, leaders from Germany, Italy, and Greece expressed optimism that an agreement would be reached soon. However, tensions are rising in the region because the leaders have once again pushed this problem to a crucial moment. A meeting is planned for this coming Monday, during which officials most likely will discuss the bailout. This will precede a summit on March 1st and 2nd, which could turn into a showdown on whether to provide the Greek bailout or wait until after April elections in Greece to proceed.
President Obama submitted his budget proposal to Congress on Monday of this week. The budget, which contains a number of spending measures, is not considered to have any chance of passing due to strong Republican opposition. Most analysts view the budget proposal as a political statement as Obama draws a populist line between himself and his political opponents. One aspect of the budget that took many investors by surprise was that it calls for a substantial tax increase (to a maximum of nearly 40 percent) on dividend earnings for households that make above $250,000. It also calls for an increase in the tax rate for long-term capital gains for wealthier Americans.
Republicans and Democrats hammered out a deal this week to extend the current payroll tax cut that is due to expire at the end of February. Although leaders from both parties indicated they would support the deal, many see the agreement as a victory for Democrats, since Republicans did not demand that the tax cut extension be offset by a corresponding reduction in spending as they have during negotiations in the past. A number of Republicans in Congress are unhappy that the agreement will add $100 billion to this country’s national debt.
The housing industry received some good news this week as the National Association of Home Builders’ monthly sentiment index for single-family home builders rose 4 points, the fifth straight month of gains. Jobless claims here in the U.S. fell to near a four-year low last week. The core producer price index, a measurement of producer prices outside of food and energy, had its largest increase in the last six months. Although some see this as inflationary, others see inflation as unlikely because of the weak labor market. On Friday, the U.S. consumer price index was released, and there was concern that higher energy costs may hamper the economic recovery.
Moody’s Investor Services downgraded the sovereign debt ratings of six countries this week, including Spain, Italy, and Portugal, while also downgrading the outlook for Austria, France, and the United Kingdom. Moody’s stated it was worried about Europe’s ability to undertake the reforms needed to address the crisis and the amount of funds available to fight it. It also said the region’s weak economy could undermine austerity drives by governments to fix their finances. Later in the week, Moody’s announced that 131 financial institutions worldwide (114 of which are in Europe) could soon receive a credit rating cut as a result of both the sovereign debt crisis plaguing the eurozone and a reflection of deteriorating creditworthiness of European governments.
In Syria this week, government forces continued to attack rebels and civilians in an effort to stop the current uprising. The city of Homs has been bombarded by artillery and rocket fire for almost two weeks, and reports were that the Syrian government had initiated attacks in other cities throughout the country that left many dead. The revolution in Syria has pressed on for 11 months, and residents of that country believe that their country is headed for an all-out war. The U.N. estimates that several thousand civilians have been killed.
Weekly Spot Prices
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