2012-04-30

Intentions to keep monetary policy at highly accommodative levels are a bullish case for gold prices

The gold price rose $5.82, or 0.4%, to $1,663.72 per ounce on Friday following S&P’s downgrade of Spain and a worse than expected report on U.S. GDP.  The price of gold climbed after Standard & Poor’s lowered its Spanish sovereign credit rating by two notches to BBB+ and first quarter GDP increased by 2.2% – below the 2.5% consensus estimate among economists.

While the gold price has now advanced on five of the past six trading days, it remains lower in April by 0.7%.  In doing so, the yellow metal is still on pace for its first stretch of three consecutive monthly declines since early 2001.

As financial markets had a chance to digest the outcome of the Fed meeting, several strategists weighed in with their view of the implications for the price of gold.  James Steel, a precious metals analyst at HSBC, stated that “Although the Fed did not announce another round of easing, intentions to keep monetary policy at highly accommodative levels are a bullish case for gold prices…The decline of gold prices on the Fed announcement was an overreaction.  The ability of gold prices to bounce back is a good sign.”

Andrey Kryuchenkov, an analyst at VTB Capital, contended that “There is little reason to sell gold at the moment.  Risk aversion is not where it should be for gold to rally much, but at the same time sentiment is cautious at best.”

Tom Kendall, head of precious metals research at Credit Suisse, wrote in a note to clients that “The message out of the Fed didn’t really change much. We had a little sell-off immediately after the statement came out, but it quickly recovered.”

“I think it would have taken a much greater change in stance coming out of the Fed for gold to really make a big break one way or the other,” Kendall added, “and given the disappointing U.S. data coming out over the last couple of weeks, I don’t think that was particularly likely.”

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