Bank of America Merrill Lynch raised its 12-month gold price target to $2,000 per ounce

The gold price dove Friday morning after the CME Group raised margins on gold futures contracts by 22%. The price of gold traded to a new all-time high of $1,815 per ounce overnight before falling back to $1,756. Initial margin will climb from $6,075 to $7,425 and variation margin – for hedging purposes – will move up to $5,500 from $4,500. The move by CME led to liquidation in electronic trading on the COMEX.

One primary catalyst for the gold price rally and broader market weakness on Wednesday was escalating concerns that the European sovereign debt crisis was spreading to the euro zone’s second-largest economy, France. Rumors surfaced yesterday that Societe Generale – one of France’s largest banks – was facing liquidity issues related to its sovereign debt exposures. In addition, speculation arose that the ratings agencies were preparing to downgrade France’s credit rating from AAA status. However, Societe Generale’s CEO emphatically denied the speculation, and a French downgrade has yet to materialize.

As for developments in the United States impacting the price of gold, Bank of America Merrill Lynch raised its 12-month gold price target to $2,000 per ounce. According to the firm, S&P’s downgrade of the U.S. AAA rating is likely to further contribute toward an uncertain economic backdrop in which gold prices generally flourish.

The downgrade will also “probably increase the pressure on emerging market central banks to diversify their international reserves of U.S. dollars and into gold,” Bank of America wrote in a note to clients. Furthermore, the firm wrote that “With inflation expectations anchored by high energy prices, real interest rates should remain low and provide support to gold prices going forward.”

With respect to the Federal Reserve and its impact on the gold price, Bank of America estimated that there is a 40% chance that the Bernanke-led Fed will launch a third round of quantitative easing (QE3) within the next 12 months. This prediction echoed a call made by Goldman Sachs earlier this week that the odds of QE3 have risen above 50%, which would make the case for higher gold prices even stronger.

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