End of week Gold and Silver recap: Gold breaks $1,700

Model of the ECB's new headquarters, which is ...

Model of the ECB’s new headquarters, which is due to be completed in 2014. (Photo credit: Wikipedia)

Written by John.Foster@APMEX.com

Gold Breaks $1700:

Gold continued it march past $1700 an ounce as growing signs the European Central Bank will take action added to disappointing U.S. economic data this week.  Fridays United States nonfarm jobs report showed 96,000 jobs were created in August. The number was disappointing because it fell short of the 125,000 that had been expected. The August manufacturing report showed the largest drop in more than three years. The nation’s factory activity was rated at 49.6, which indicates an unforeseen contraction in the sector. United States construction also fell off by 0.9 percent; as with the manufacturing report, experts had predicted an increase, as well.  This news was bullish for Gold and boosted the possibility of financial stimulus from the Federal Reserve. The expectation is that the Federal Reserve will announce the next round of quantitative easing, better known as QE3, this year. Jeremy Friesen at Societe Generale in Hong Kong said he believes the Fed will act possibly this month. He said, “We think the payrolls number will be very poor, which should be positive for Gold, as it would confirm that the Fed will do something at the next FOMC (Federal Open Market Committee) meeting.”

Europe Announces Bond Program:

The European markets started the week strongly on hopes that the ECB would announce a plan to curb widespread debt in the region. Many economists in the area believed there would be a large bond buying plan to offset short term debt. One media report went as far to say the ECB will spend “unlimited” amounts to do so, and that caused quite a stir. “I think the market saw the word ‘unlimited’ and jumped before realizing that the ECB would not expand its balance sheet as it would sterilize all its purchases, and thus this was not the kind of aggressive monetary expansion that FX traders were looking for,” said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York.  On Thursday the European Central Bank announced its intention to rebuild the eurozone with new stimulus measures by purchasing sovereign bonds. Alex Merk at Merk Investments commented on how the market may be more interested in the euro. “Now, I’m not going to pretend that everything is going to be great in the eurozone, but it (the ECB’s measures) does take off the so called ‘tail risks,’ it makes the euro less risky.” On a positive note, Merk added, “We think the euro is going to do well in the years to come. … It is becoming a different currency with different dynamics in place.”

China’s Economy Slowing:

The United States and Europe may not be the only economies on the verge of receiving a stimulus. Although the Chinese government has yet to implement any stimulus measures in the face of a slowing Chinese economy, there is additional evidence that the Chinese economy is slowing. On Saturday (09/01), the official manufacturing sector survey reported a 49.2 reading in August. This falls below the level of 50 that separates expansion from contraction. In another survey more focused on small to midsize businesses, published by HSBC, the number was 47.6.  Gordon Chang, author of “The Coming Collapse of China,” spoke with CNBC regarding China’s economy and how some data reflect zero growth for that nation. Chang said that manufacturing surveys, price indices and electricity production are all key indicators of economic growth, and those factors suggest no growth in China’s economy. Chang said, “By far the most reliable indicator of Chinese economic activity is the production of electricity. When you look at the period of April through July electricity production increased by less than an average of 1.2 percent.”  He said electricity production typically outpaces economic growth

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Gold in Postive Territory

Precious metals are rising again, largely on safe haven appeal, as concerns in Spain and Greece have not abated and gold imports in China are climbing. HSBC wrote, “Gold prices may be supported by China’s growing appetite for bullion, as imports from Hong Kong climbed to record highs. Furthermore, imports of gold coins, which are reported in a separate category in the trade data, increased significantly to 1,876 kg in April from 5 kg in March. The ability of China to sustain gold imports is impressive, considering that the economy is showing signs that growth is cooling and income growth is moderating.” Meanwhile Commerzbank feels that gold has “regained its safe haven status.”

At the G-7 conference, Spain’s Treasury Minister Cristobal Montoro basically sounded the alarm about how bad the banking situation is in Spain at this time. As the debt gets worse the access to credit to help bail themselves out is becoming more and more detrimental. He even called for European assistance, a departure from what other government officials had wanted, which was to raise the funds itself. Germany is pushing Spain to accept the bailout. In an interview Montoro said, “The risk premium says Spain doesn’t have the market door open. The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt.”

Central banks remain squarely in the crosshairs as the main target to appease economic concerns. Federal Reserve Chairman Ben Bernanke is expected to testify before a congressional panel Thursday about the current economic outlook and monetary policy. Chief strategist Michael Derks said, “Policy makers would appreciate that both growth and inflation remain too low, and that financial conditions have the potential to be eased still further. As such, Bernanke and his fellow board members are probably considering a further round of [quantitative easing], coupled with an extension of their forward guidance on monetary policy.”

At 8:02 a.m. (EDT) – the APMEX Precious Metals spot prices were:

  • Gold – $1,617.70 – Up $4.30.
  • Silver – $28.41 – Up $0.32.
  • Platinum – $1,440.80 – Up $11.50.
  • Palladium – $613.50 – Down $0.40.
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Gold’s long term endurance touted; America records budget surplus

The Gold price has dropped to a low not seen since 2008. When this happened in the past, it made investing in the Precious Metal a great opportunity. The short-term outlook does not seem to show much change, as long as the situation in Europe continues and the United States’ economy keeps moving upward. However, “On a long-term basis, Gold has a place in most investment portfolios for two reasons: We foresee demand returning from emerging markets, and more and more investors buy Gold as a hedge against inflation,” said Sanjeev Sardana, financial adviser and chief executive officer of Bluepointe Capital Management.

The 13-year stretch of growth in China seems to be losing momentum. Reports of China’s industrial production and retail sales missing forecasted numbers are major factors. The People’s Bank of China is adding about 400 billion yuan into the banking system by cutting reserve requirements. The current interest rates have also raised concerns. “Chances of an interest-rate reduction are still small at the moment,” said Lu Ting, a Hong Kong-based economist.

Something happened in the United States for the first time since 2008. In April, the Treasury Department recorded a $59 billion surplus. Even with this good sign, it is not expected to last. The Treasury is facing a $1.33 trillion deficit for 2012. It is less than last year’s number, but far from positive enough to give investors the confidence they need.

At 1 p.m. (EDT), the APMEX Precious Metals spot prices were:

  • Gold – $1562.40 – Down $23.10.
  • Silver – $28.38 – Down $0.59.
  • Platinum – $1444.40- Down $28.00.
  • Palladium – $595.10 – Down $9.30.
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