Saturday, August 17, 2013

What’s Driving Gold Prices Today

Money Morning
The latest dip below $1,300 an ounce for gold was brought about by renewed fear in the financial markets that the Fed will begin tapering bond purchases from the current level of $85 billion a month.
Despite the rhetoric, however, the Fed is unlikely to reduce its bond purchasing, because the US economy is growing at lower than targeted rates.
Federal debt is another reason quantitative easing is here to stay. Over the next decade, $6.6 trillion will be added to the national debt. Someone needs to buy those Treasuries, and that someone is likely to be the Fed. That high liquidity level should be positive for gold prices.
Meanwhile, the Asian love affair with gold continues. China has replaced India as the world's largest buyer of the physical metal. A government crackdown on purchases has slowed the gold trade in India.
China's demand for physical gold is nearly the equivalent of total global gold mine production. Net flows of the precious metal from Hong Kong into China nearly doubled from 2012 levels in the first half of this year, to 575 tonnes. Asia’s appetite for paper gold in the form of bullion-backed ETFs is also growing.
Data shows that while western investors were fleeing precious metals exchange-traded funds, Asian investors poured a net $33.5 million into gold and gold mining ETFs in the second quarter of 2012.
Asian investors don't concern themselves with hopping aboard short-term trends, and are more concerned with accumulating long-term wealth. When the price of gold drops, Asians accumulate more.
If Asians eventually embrace paper gold as they do physical gold, it will be a force sending gold prices higher for years to come. Canny western investors should adopt the same attitude as the Asians.
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