Gold "Dominated by Uncertainty" as "Reality Dawns" for Investors in Stocks

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"We expect QE3 to become an increasingly dominant issue for the markets as we enter September."

U.S. dollar gold prices wavered around $1830 an ounce Wednesday morning London time—4.3% off last week's all-time record high—as prices of major commodities fell and stocks rose following Tuesday's publication of the latest U.S. Federal Reserve minutes.

Silver prices meantime traded around $41.41 per ounce—the price at which they started the week.

The gold price at Wednesday morning's London Fix was $1826 per ounce, with gold heading for its biggest monthly gain since November 2009.

"The overall outlook for the precious metals remains dominated. . .by uncertainty over economic growth, and by speculation over what action policymakers might take to address the issue," says one London gold bullion dealer.

"We expect QE3 [a possible third round of quantitative easing] to become an increasingly dominant issue for the markets as we enter September."

If QE3 does not happen, however, then "we probably could expect gold prices to slide from this level," warns Tom Price, global commodity analyst at UBS, "[if] we see slow improvement out of the United States, China increasing its control over inflation and the European market not lurching lower."

In the U.S.—where consumer confidence has, according to official surveys, hit its lowest point in over two years—the U.S. Federal Reserve published the minutes of its latest Federal Open Market Committee meeting on Tuesday.

"Some members expressed the view that additional accommodation was warranted," said the minutes.

"They expected the unemployment rate to remain well above, and inflation to be at or below, levels consistent with the Committee's mandate."

The Fed has a dual mandate to ensure stable prices and maximum employment. Though it currently has no official target for either, the Fed has forecast long run inflation to be between 1.7% and 2%, widely regarded as an informal target. Consumer price inflation in July was 3.6% per year.

The FOMC voted at the meeting on August 9 to maintain its policy rate below 0.25%, announcing afterwards that it expects its rate to stay "exceptionally low" for at least two years.

"The odds are rising that we will see more action to aid the economy at the September meeting," reckons James O'Sullivan, chief economist at MF Global in New York.

U.S. stock markets rose following publication of the minutes, with the S&P 500 ending Tuesday up 0.2%.

Asian stock markets also rose in Wednesday's trade, as did European stocks on Wednesday morning.

Since the start of July, however, the FTSE 100 has lost 10.6%. The S&P is down 8.2%, the NIKKEI 225 has lost 8.8%, while the German DAX has plunged 22.6%.

"Over the summer period reality has been dawning, with investors realizing that the recovery is not going to be straightforward," says Richard Jeffrey, chief investment officer at Cazenove Capital Management.

By contrast, gold prices have gained nearly 23% over the same period.

"The belief that the risk asset classes are compromised and are not worth having is driving gold prices up," explains Swiss precious metals refiner MKS.

Over in China meantime "gold is a one-way market" at the moment, according to one bullion trader in Hong Kong, where dealers report that premiums have risen as high as $1.50 an ounce—up from $1.20 last week.

"With low interest rates and the possibility of a third round of quantitative easing in place, people are buying gold after prices corrected. . .the precious metal remains an attractive safe haven."

"Prices came down from the peak last week," adds a dealer in Singapore.

"This is the main cause behind the buying."

"Physical demand is likely to be strong in September, October and November," predicts another dealer quoted by news agency Reuters.

Analysts and dealers also expect strong buying from world's largest gold market India over the next three months, as the country begins its annual festival season.

Here in Europe, Germany's cabinet on Wednesday approved increasing the size of the European Financial Stability Facility, the Eurozone's bailout mechanism. Germany's share of EFSF loan guarantees will rise from €123 billion to €211 billion.

"The German government has strengthened its determination to secure the stability of the euro," said finance minister Wolfgang Schaeuble.

"I'm not against helping Greece," countered Wolfgang Bosbach, a fellow-member of Chancellor Merkel's CDU party.

"I just doubt that ever-higher debts can actually help. . .this is a fundamental question for our children and grandchildren, whom we're already saddling with mountains of debt—and then we're adding huge risks on top of that."

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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