2012-10-10

Gold price were supported by a report from the International Monetary Fund (IMF)

The gold price stabilized near $1,775 per ounce on Tuesday despite further strength in the U.S. dollar.  Gold price were supported by a report from the International Monetary Fund (IMF) which lowered its forecasts for global economic growth in 2012 and 2013 and highlighted an “alarmingly high” risk of a more significant slowdown.  The spot price of gold held in a narrow range between $1,773 and $1,782 in overnight trading, while the U.S. Dollar Index (DXY) advanced 0.3% to 79.788.

The IMF’s report reduced its 2012 target of global GDP growth to 3.3% from 3.5%, and its 2013 projection to 3.6% from 3.9%.  In addition, the firm noted that its forecast implies a 15% possibility of recession in the United States in 2013, a 25% chance in Japan, and a more than 80% likelihood in the euro zone.  The IMF pointed specifically to Greece and Spain as nations where the economic challenges are most acute.

In its report, the IMF cited government spending cuts, stress in financial markets, persistently high levels of unemployment and substantial political uncertainty as reasons for its forecast reduction.  Furthermore, it noted that “The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook… Downside risks have increased and are considerable.”
While the gold price generally benefits from the response of policymakers to financial and economic weakness, this morning the yellow metal’s advance was tempered by the U.S. dollar, which has been the safe haven asset of choice during deflationary periods.

Commenting on these developments, Deutsche Bank’s head of commodities research – Michael Lewis – stated that “The return of dollar strength has stalled the move in gold.”  However, he added that the dollar’s rally is “very temporary,” and that the price of gold is “still on track to see more gains.”

Lewis went on to say that “The danger with Greece and Spain is that it does have a tendency to increase the buying of U.S. treasuries, which is dollar supportive. But our sense is that the real driver for the dollar will be real interest rates and real interest rates in the U.S. are negative.”

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