13 August 2010, 2:40 p.m.
By Debbie Carlson
Of Kitco News
http://www.kitco.com/
Chicago -- (Kitco News) Renewed concerns over the growth of the U.S. and global economies are back to the forefront of traders’ minds and safe-haven plays are likely to continue to lift gold prices next week.
Mixed economic data and the quantitative easing step by the Federal Reserve during Federal Open Market Committee meeting Tuesday have helped gold prices stay above $1,200 this week. Investors are returning to gold after pulling money off the table in July and physical buyers have stepped back as prices gained.
Looking at most gold futures on the Comex division of the New York Mercantile Exchange, the December contract gained 4.9% since its low set on July 28 of $1,159.30 an ounce to settle at $1,216.60. Nearby October futures rose 5% from its July low of $1,157.50 to settle at $1,215.40.
The rise is coming from investor demand, said Commerzbank and Barclays Capital in separate research notes Friday. Barclays said exchange-traded fund holdings in gold across the board have risen six days in a row, but the gains have not wiped out the big outflows these investments saw in July.
Barclays said gold is comfortable wearing its “currency hat” because of a return to worries over macro economic fears, so investment demand should support prices in the months to come. However, “once market participants are more comfortable with the shape of economic recovery and interest rates start to rise, we then expect some investor interest to start to ease, and subsequently jewelry demand will need to step in to provide a cushion, which we believe will be higher than historical levels,” they said.
Sterling Smith, analyst at Country Hedging, said he thinks gold prices will continue it its uptrend as commodities in general rise. Commodity prices, led by wheat, have rallied lately. There has been some concern that the sharp rally in grain prices because of a severe drought in Russia and neighboring countries could spark food inflation. However, Smith said that’s still a wait-and-see. Wheat supplies elsewhere, especially in the U.S. are still ample.
Plus, he said, there’s a question on how easily food companies can pass along those costs.
Smith said the technical picture for gold is turning bullish. He pointed to a reverse head and shoulders pattern for October Comex gold which could push prices to about $1,240 if gold can stay above $1,220. He said strong support for gold is seen at the $1,200-$1,210.
He expects gold to target its previous all time highs set in June, but probably not until September at the earliest. “August is too soon. With summertime trading you have to be careful,” he said, because thin volumes can make trading more volatile.
While gold benefitted from the renewed worries of an economic slowdown, base metals like copper saw their recent gains curbed. Bart Melek, global commodity strategist at Bank of Montreal, said unless the markets see real signs that demand isn’t falling and a double-dip recession won’t occur, industrial commodity prices in general – base metals included – will not move higher “on a sustainable basis.”
He also said for base metals to rise the Chinese government needs to signal it isn’t going to slow its economy further, along with more U.S. government spending and quantitative easing. Longer-term he expects both to happen, along with the possibility of new Chinese stimulus “in the not too distant future.” Those actions would ignite global growth, which BMO puts at just under 4% in 2010 and 2011, with China averaging near 10%. That would lift industrial commodities into 2011, and gold will benefit, too. “Having it both ways, gold should do well as record low interest rates will likely ignite long-term inflation concerns once the economy stabilizes,” he said.
Smith said the outlook for copper will be news-dependent. Chinese economic data will be key and copper received some positive news after strong German growth in the second quarter. The German gross domestic product increased 2.2% in the second quarter, the fastest in 20 years. Some analysts caution though, the rise came at the expense of the drop in the euro, so third quarter growth will likely not be as strong.
While there are some furrowed brows out there over the state of the U.S. economy, Kansas City Federal Reserve Bank President Thomas Hoenig doesn’t have one. In fact, Friday he said keeping U.S. interest rates at zero were “a dangerous gamble” during moderate growth and said deflation is not a problem. According to MarketWatch, Hoenig has dissented at every Fed policy meeting and said the Ben Bernanke, Fed chairman, and his allies were trying to use monetary policy as a “cure-all” for U.S. woes.
Gold did not react too much to his comments, however.
By Debbie Carlson, contributing to Kitco News;dcarlson@kitco.com
Editor’s Note: Meet the Kitco News Team at the upcoming Kitco Metals eConference September 12-13, 2010. A not-to-be missed event featuring Ron Paul, Marc Faber and other industry heavyweights. The eConference is free with Pre- Registration www.kitcoeconf.com.
