Gold has two strong reasons to rally

Gold price traded to yet another record high at $1,921 per ounce overnight before moving back below $1,900 Wednesday morning. The price of gold surged following heavy liquidation in European stock markets on the back of a key election loss by German Chancellor Angela Merkel’s political party. S&P 500 stock futures plunged 27.30 to 1,142 while the cyclically-sensitive copper price, lower by 1.8% to $4.05 per pound, headed for its largest loss in over a month. The gold price rallied and equity markets in Asia and Europe posted steep losses amid escalating euro zone sovereign debt concerns. The rising fears stemmed from the news that German Chancellor Angela Merkel’s political party suffered its fifth election loss this year and its worst showing since 1990.

Although this week’s economic calendar is on the lighter side, there are several key items likely to impact gold prices and the broader markets. The ISM Services Index is due out later this morning, followed on Wednesday by the Fed’s Beige Book. Weekly jobless claims will be released on Thursday, along with President Obama’s proposal of a new stimulus program aimed at boosting the employment market.

In addition to Obama’s announcement, Ben Bernanke is scheduled to provide his latest economic outlook in a speech on Thursday. Investors will be paying close attention to see if the Federal Reserve Chairman provides any signals regarding monetary policy at the upcoming FOMC meeting on September 20-21.

Commenting on the outlook for the gold price, UBS analyst Edel Tully wrote in a note to clients that “With the implications of Friday’s U.S. payrolls report and intense focus on European sovereign issues this week, gold has two strong reasons to rally. Additional evidence of U.S. economic weakness raises the likelihood that the Federal Reserve will announce further easing this month. As European woes reclaim center-stage and in turn investor nervousness extends, these factors will support gold in the coming weeks.”

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