HardAssetsInvestor

July 10, 2012

Gold ETF Holdings Hit Record High As Yellow Metal’s Rubber Band Tightens

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We offer our latest analysis on the precious metals market.

Despite continued deterioration in the outlook for the U.S. economy, gold prices maintained themselves within their range between $1550 and $1620 over the past week.

The market is either giving investors and traders ample time to accumulate positions before the next leg higher or a lot of people—ourselves included—are going to be caught off guard by an unexpected move lower.

GOLD

In our view, a third round of quantitative easing (QE3) from the Federal Reserve is becoming increasingly likely. The U.S. manufacturing sector is contracting and job growth has slowed down markedly.

While the economy is not in recession territory, economic growth is feeble at levels just above 1 percent. When the Fed extended its Operation Twist asset swap program last month, it essentially set the groundwork for the more significant QE3 as it awaited more data.

Shortly after the Fed’s last meeting, the ISM reported that its manufacturing index fell below 50 for the first time since 2009. Then, June’s nonfarm payrolls report showed that employers added less than 100K jobs for the third month running. This new data may spur the central bank to ease policy further.

Of course, should the Fed be late to act, or should an external shock send the global economy into a deep slump, gold could tumble amid broad-based risk aversion across the financial markets. This would be akin to the 2008/2009 scenario.

However, that is not our base-case view. Only Europe’s sovereign debt crisis has the potential to create such a scenario. But the downside risk of a eurozone collapse is so high that we believe policymakers will be forced to prevent it by any means necessary—including quantitative easing by the European Central Bank, which has thus far been reluctant to expand its balance sheet.


SILVER

PLATINUM

PALLADIUM