2011-11-16

Gold prices have traded in a tight band over the past two weeks as yields on European sovereign debt have soared

The gold price continued to consolidate under the $1,800 per ounce level Tuesday amid the turmoil in Europe. Gold prices have traded in a tight band over the past two weeks as yields on European sovereign debt have soared. Italy’s 10-year bond yield spiked through 7% early this morning. In a note this morning, Susquehanna Financial Group highlighted that “spreads between Belgian, French, Spanish, Italian bonds and the German 10-year bunds are blowing out.” S&P 500 stock futures sank 10.10 to 1242.30 while copper prices fell back under $3.50 per pound.

Despite Monday’s gold price decline, the Gold remains higher by 25.3% on a year-to-date basis and is on pace for its 11th consecutive annual advance. The macroeconomic backdrop of rampant currency debasement and negative real interest rates, among other factors, has continued to push gold prices to new highs. Many market strategists believe this trend is likely to continue in the years ahead, as central banks in the world’s most developed economies remain committed to fighting deflation with easy monetary policies.

The latest investment bank to raise its gold price forecasts was Goldman Sachs, which in a recent note to clients wrote that the escalating sovereign debt crisis in Europe is “skewing the balance of risks to higher gold prices” over the next year. “We expect gold prices to continue to climb in 2011 given the current low level of US real interest rates,” the firm contended. “Further, with our US economics team now forecasting slower US economic growth in 2011 and 2012, we expect US real interest rates to remain lower for longer, supporting higher gold prices through 2012.”

As for specific gold price targets, Goldman Sachs lifted its three-month estimate to $1,760 from $1,645 per ounce, its six-month estimate to $1,830 from $1,730 per ounce, and its 12-month estimate to $1,930 from $1,860 per ounce.

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