GOLD PRICE NEWS – The gold price, at $1,785 per ounce, traded near unchanged Wednesday following the news that producer prices rose more than anticipated. The price of gold showed a muted reaction to the release of the Producer Price Index (PPI), which rose 0.2% month over month and 7.2% year over year – both slightly hotter than a Bloomberg survey of economists. Commodities moved higher across the board with crude oil rising 1.5% to $87.99 per barrel and copper advancing 0.6% to $4.04 per pound. Silver rose above $40, climbing $0.15 to $40.05 per ounce.
On Tuesday, the gold price rallied $18.59 to $1,784.89 per ounce amid the return of risk aversion. The price of gold briefly dropped to $1,766 in morning trading, but rebounded well into positive territory as trading progressed. COMEX gold futures, per the December contract, settled at $1,785 per ounce, a new all-time high on a closing basis. However, gold futures remained below their intra-day record high of $1,817.60, reached last Thursday. Silver moved higher in concert with the gold price. With their gains, the price of gold and silver extended their year-to-date returns to 25.6% and 29.3%, respectively.
Strength in the gold price was unable to lift gold shares, however, as the AMEX Gold Bugs Index (HUI) slid alongside the broader equity markets. The Dow Jones Industrial Average (DJIA) fell 76.97 points, or 0.7%, to 11,405.93, while the CBOE Volatility Index (VIX) climbed 3.1% to 32.85.
Despite opening modestly higher in concert with the gold price, the HUI finished with a loss of 1.2% at 573.02. Among gold mining companies, Goldcorp (GG), IAMGOLD (IAG), and Kinross Gold (KGC) retreated 0.8%, 2.2%, and 0.4%, respectively. Gold mining stocks traded near unchanged Wednesday morning.
The gold price extended its gains yesterday after German Chancellor Angela Merkel and French President Nicolas Sarkozy released a set of proposals designed to bring more fiscal unity to the euro zone. Although the proposals called for the creation of a Eurozone President and for each nation to adopt a balanced budget, the plan was quite short on details. Moreover, the proposals did not suggest specific measures to alleviate the PIIGS’ debt woes or to improve the outlook for their economies. These shortcomings left investors disappointed, reflected in the broader markets’ slide and the rally in the price of gold.
In the U.S., the gold price also indirectly received support from a Goldman Sachs research report. In a note to clients, Francesco Garzarelli, chief interest-rate strategist, altered his monetary policy forecast to include a third round of quantitative easing (QE3) in its “most likely scenario.”
“The central bank has indicated that its current economic forecasts warrant policy rates remaining close to zero for at least another two years and that it stands ready to expand its balance sheet further if needed,” Goldman’s Garzarelli wrote. “We have built a third round of long-term asset purchases (‘QE3’) into our baseline, although that is, of course, contingent on sub-trend growth in the near term.”
While Goldman Sachs did not discuss the implications of QE3 for the gold price in the report, history suggests it would be quite favorable for the price of gold. Richard Russell, a long-time gold bull and author of Dow Theory Letters, presented his case for higher gold prices.
“When chaos reigns, people look for certainty,” Russell wrote in a recent letter. “When all is lost, only one item stands supreme and has been supreme for thousands of years. That item is gold…The anti-gold element is afraid of gold hitting the even number of $2,000, thus we see gold, day after day, fluctuating in the $1,500 to $1,700 area, but never breaking out to $1,900, or God forbid – $2,000.”
Russell went on to say that “At $2,000, the next objective would be $2,500, and from there $5,000, and from $5,000 – $10,000. As gold marches higher, it’s playing the death knell for fiat money. And every central banker knows it.”