Gold Price Climbs as Europe Looks to Boost Firepower

GOLD PRICE NEWS – The gold price climbed $4.00 to $1,671 per ounce Monday morning against the backdrop of a weaker U.S. dollar.  Gold prices advanced through their 50-day moving average and have now rallied $108 thus far in 2012.  The U.S. Dollar Index fell 0.37 to 79.77, led by a higher euro, which recaptured the 1.30 level against the greenback.  Helping to power the gold price was news out of Europe that Italian Prime Minister Monti and European Central Bank President Draghi were working towards doubling the capacity of the European Stability Mechanism (ESM) from €500 billion to €1 trillion.

Gold prices are coming off of a $9.00 rise last Friday, which resulted in the yellow metal extending its weekly gain to 1.7%.  In doing so, the spot price of gold posted its third consecutive weekly advance.  The gold price, which was bolstered last week by a broad-based rally in financial markets and weakness in the U.S. dollar, has appreciated 6.7% in 2012.

Silver rose $0.11 to $32.29 Monday morning after significantly outperforming the gold price last week.  Gold’s sister precious metal surged 8.3% over the five-day period, trading to a six-week high and stretching its gain in the New Year to 16.0%.

While the price of gold headed north, gold shares did not follow suit.  The Market Vectors Gold Miners ETF (GDX) – a basket of the world’s largest gold companies – snapped a two-week win streak by falling 3.5% to $52.18 per share.  The inability of gold stocks to rally alongside the gold price marked the latest disappointment from a sector that has woefully underperformed the yellow metal in recent years.  Notable decliners last week included Agnico-Eagle Mines (AEM), IAMGOLD (IAG), and Newmont Mining (NEM) – which fell 5.9% 7.7%, and 6.5%, respectively.

In contrast to the gold stocks sector, the broader equity markets advanced for a third straight week.  The Dow Jones Industrial Average (DJIA) climbed 2.4% to 12,720.48, its highest level since July 22, 2011.  The S&P 500 Index jumped 2.0% to 1,315.38, near a six-month high as well.  The markets’ strength coincided with a substantial decline in investor risk aversion, as measured by the CBOE Volatility Index (VIX) falling to 18.28 – also near a six-month low.

Commenting on the recent gold price ascent, ANZ bank senior commodity strategist Nick Trevethan wrote in a note to clients on Friday that “Gold has had a fairly good run so far this year, maybe this is time to consolidate a little. A pause here would probably be a healthy sign. After that, I think the next move is likely to be up towards $1,680.”

Trevethan went on to say that “I think physical flows may slow a little next week. Chinese buyers will still take the time to come to the market if prices fall significantly. So, I think there’s going to a floor under the market, initially at $1,650, but I can’t see a big fall to below $1,600.”

Looking ahead to the coming week, Ben Bernanke and the Federal Reserve will be in focus as Wednesday’s FOMC meeting approaches.  A growing set of economists have speculated that a third round of quantitative easing (QE3) is forthcoming due to stagnation in the U.S. labor and housing markets and ongoing sovereign debt concerns in Europe.  However, the consensus view among economists remains that the Fed will wait to launch QE3 until later in the year.  Investors will therefore be keeping a close eye on the price of gold for clues as to the direction of U.S. monetary policy.

The remainder of the week includes several key U.S. economic reports – including Pending Home Sales on Wednesday; Weekly Jobless Claims, Durable Goods, Leading Indicators, and New Home Sales on Thursday; and Fourth Quarter 2011 GDP and University of Michigan Consumer Sentiment on Friday.  If the data continues to indicate tepid economic growth, the gold price is likely to remain well supported, while better than expected reports could provide a headwind for the yellow metal.