HardAssetsInvestor

July 03, 2012

Gold Poised For Breakout With ECB Rate Cut & QE3 Looming

Details

We offer our latest analysis on the precious metals market.

Gold is back on the rebound today, and for the third time in just as many weeks, is poised to test the key $1640/oz. resistance level. Will prices fall back again or are they set to finally break through to the upside?

In our view, bulls will finally manage to propel prices above $1640 this time around.

GOLD

Eurozone sovereign debt concerns are fading, which has allowed stocks and commodities to rebound. Today, the S&P 500 stock index hit the highest level in two months.

On the surface, this may seem counterintuitive to some. Why is gold rallying when European worries are receding?

That’s because gold is being treated as a risk asset by traders—not a safe haven. This has been the case all year long. Thus, the metal benefits as investor risk appetite increases, just as it suffered when appetite declined in May and June.

Also boosting investor sentiment are growing hopes that central banks around the world will unveil fresh stimulus measures to reinvigorate flagging economic growth. ISM’s gauge of the U.S. manufacturing sector this week fell below 50 (the line that separates contraction from expansion) for the first time in three years in June.

Data on manufacturing in Europe and China were also weak.

That may spur central banks to act. The European Central Bank is expected to cut its benchmark overnight interest rate to a record-low 0.75 percent on Thursday. Of course, the bigger upside catalyst for gold would be a third round of quantitative easing (QE3) from the Fed.

The U.S. central bank will meet next on Aug. 1 to make its monetary policy decision. Our base case is that the Fed will not unveil QE3 at the meeting, but precious metals will still rally modestly in the interim as investor sentiment continues to recover. However, should the Fed surprise with more quantitative easing, the sector will likely move aggressively higher.

SILVER

PLATINUM

PALLADIUM