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HSBC: Gold to Hit $1,900 an Ounce by Year End

Friday, 03 August 2012 09:08 AM

Gold prices will top $1,900 an ounce by the end of the year as uncertainty surrounding the nation's fiscal health will send investors in search of the yellow metal as a safe-harbor play, experts say.

Gold is currently trading around $1,600 an ounce.

At the end of the year, Bush-era tax cuts and other tax breaks expire while automatic cuts to government spending kick in, a combination dubbed as a fiscal cliff that could push the economy into a recession next year if left unchecked by Congress.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

The Fed could intervene with stimulus measures, as lawmakers will likely do nothing to address tax and spending issues in an election year and opt to deal with it retroactively in January.

Yet monetary stimulus measures jolt the economy often by flooding the financial system with liquidity, which weaken the dollar, gold's traditional hedge.

A weaker dollar and economic uncertainty create the perfect cocktail for a gold rally.

“Economic uncertainty, geopolitical tensions and the uncertainty of the U.S. November elections are theoretically gold-bullish,” and gold should perform better later in the year “when U.S. growth is poor and the dollar is weak,” HSBC analysts wrote in a report, according to CNBC.

“We expect prices to rally to above $1,900/oz by the end of the year. Patience is the most important commodity.”

The Federal Reserve has already pumped $2.3 trillion into the U.S. economy since the downturn via a monetary policy tool known as quantitative easing, under which the Fed buys bonds from banks, which creates conditions that aim to foster investing and hiring.

Other central banks around the world, including the European Central Bank, the Bank of England and the Bank of Japan, have carried out similar measures, which will further fuel demand for gold as investors shun weak paper currencies.

“The big four central banks have printed around $9 trillion during the current crisis, roughly equivalent to the total value of gold ever mined…[but] despite this long-standing pedigree as a safe haven, gold has noticeably failed to rally in the present economic turmoil.”

Gold slumped earlier this year as investors stocked up on dollar positions to cut exposure to the European debt crisis, as U.S. markets are the safest and most liquid in the world despite low returns.

That trend will change, HSBC said.

“We retain our bullish view on gold for the second half of 2012, buoyed by official sector demand and our expectations of U.S. dollar weakness as the market becomes more fixated on the currency’s value as the U.S. fiscal cliff story gains greater traction," HSBC analyst concluded.

Emerging market central banks around the world have been buying gold, most recently South Korean, which bought 16 metric tons of gold in July, its second purchase this year, according to Reuters.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop. 

"Central bank activity is in part filling in for the tame retail physical buying from the likes of India of late by helping gold on the downside and inserting a price floor," UBS analysts wrote in a note, Reuters added.

"In turn this has been providing investors with some comfort, that stronger hands are active sub $1,600, but importantly that their comfortable price entry is rising."

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Friday, 03 August 2012 09:08 AM
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