Gold’s Focus Will Remain On Europe, Hopes For Monetary Stimulus

(Kitco News) – After a round of lower-than-expected economic news out of China, Europe and the U.S., talk about the potential for more monetary stimulus pushed up gold prices on Friday and will likely keep the yellow metal supported into next week.

The most-active August gold contract on the Comex division of the New York Mercantile Exchange rose Friday, settling at $1,622.10 an ounce, up 3.2% on the week. July silver rose Friday, settling at $28.386 an ounce, up 0.44% on the week. London markets are closed Monday and Tuesday to mark the Diamond Jubilee of Queen Elizabeth II.

In theKitco gold surveyout of 33 participants, 22 responded this week. Of those 22 participants, 20 see prices up, while two see prices down, and zero are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

There was further evidence Friday that global economy is slowing, with Chinese and European manufacturing data coming in lower than expected and the eurozone unemployment rate rose to the highest level since the euro currency was created, with the 17-nation jobless rate at 11%.

There wasn’t much better news out of the U.S. as just 69,000 jobs were added in May, which is the lowest number in a year, according to the U.S. Bureau of Labor Statistics. It was also sharply lower than what was generally expected. The unemployment rate ticked up 0.1 percentage point to 8.2% as more people started looking for work even as hiring slowed. On top of May’s news, job gains for April and March were trimmed back.

Adam Klopfeinstein, market strategist with Archer Financial Services, said gold rose on fears of a global economic slowdown, particularly after a poor U.S. jobs figure.

“We saw a jump in fear. People thought that the U.S. was safe, but now there are worries of the U.S. slowing. We saw a lot of pent-up demand coming into gold,” he said.

Klopfeinstein said with yields in German bunds and U.S. Treasurys at record lows as investors buy those debt instruments as a safe haven, that asset is getting “crowded” and is offering little return. Gold, on the other hand, has found favor again because it was neglected by investors and now is considered undervalued.

“Gold had a very positive reaction to the economic news. We’ve had a change in sentiment. Prior to this, gold was acting like a dead man walking,” he said.

Several market analysts said gold was able to break through resistance at $1,600 on the hopes for more stimulus, either from the Federal Reserve or from the European Central Bank.

Andrew Busch, global currency and public policy strategist for BMO Capital Markets’ Investment Banking Division, said the talk about possible stimulus “created even more volatility for the financial markets. The reaction in gold is a perfect example of investors looking for any safe haven in this storm as the yellow metal has soared $60 today (Friday). Overall, the data and market reaction indicate the heat is being turned up on Europe to act.”

First-notice day has now occurred for the June futures, said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, and any traders who remain in the June contract are “spreading to further months indicating willingness to stay long,” Gero said.

First-notice day is the first step in the winding down of the June contract. The contract goes into what’s called the delivery period. Traders who wish to maintain their position must roll forward any June contracts into further dated months. Those who stay in the June contract are subject to make or take delivery, depending on their position, but it’s rare for traders to do so.

EUROPEAN CENTRAL BANKS MEET NEXT WEEK

Next week could set the stage for a new look at monetary stimulus, although market watchers said it’s unlikely central banks will act so fast.

On Wednesday the Fed’s Beige Book of economic conditions will be released. This report is prepared in advance of the June 19-20 Federal Open Market Committee meeting and Nomura’s analysts said this report should “take on a more cautious tone when describing current economic conditions, but should not inspire a policy change at the June FOMC meeting.”

Also on Wednesday, the ECB’s Governing Council meets, Nomura noted, adding that they don’t see the ECB changing its current policy rate of 1% until there’s a better sense on Greece’s euro-area membership. They put the likelihood of a 25-basis-point rate cut at a 30% probability. The central bank may take a “significantly more dovish” tone than at the last meeting, they said.

The greatest pressure is on the ECB to act, Busch said, given the data and market reaction. The easiest is for the ECB to revive its Securities Market Program, known as SMP, where it buys bonds from eurozone nations. “We’ll find out on Monday if the ECB has already restarted SMP when the ECB releases their data,” he said.

Other actions include another round of Long Term Refinancing Operations, another bond-buying plan, and cutting rates, but he said he thinks the ECB will still drag their feet on that.

On Thursday the Bank of England meets, but no policy response is expected yet, Nomura said.

Early next week could set the tone for gold. If August gold futures can maintain this momentum, it might target $1,645-$1,650, Klopfeinstein said. A move above $1,650 would then put $1,680 in sight.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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