Gold Price Digests Recent Gains

GOLD PRICE NEWS – The gold price oscillated around the $1,600 per ounce level Wednesday, digesting yesterday’s 2.5% gain.  News this morning that bank deposits at the European Central Bank’s overnight facility reached an all-time high this week sparked worries that funds are being hoarded – not lent out.  Banks parked €453 billion ($591 billion) in the ECB’s overnight deposit facility.  Stock prices in Europe fell 0.5% as measured by the Stoxx Europe 600 Index and crude oil slipped 0.6% to $102.39 per barrel.

On Tuesday, the gold price began the 2012 trading year by climbing $38.39 per ounce.  In doing so, the price of gold posted its best single-day gain since October 25, 2011 and recouped nearly all of last week’s sell-off.  Gold stocks were bolstered by the gold price and broader equity markets, as the Market Vectors Gold Miners ETF (GDX) surged $2.37, or 4.6%, to $53.80 per share.  Among large-cap gold producers, two of the top performers were Eldorado Gold (EGO) and Kinross Gold (KGC).  EGO advanced by 7.5% to $14.74 per share and KGC by 7.6% to $12.27 per share.

The SPDR Gold Trust (GLD), a proxy for the gold price and the world’s largest gold ETF, declined $0.60 early Wednesday morning.  Weakness in the U.S. dollar, which retreated 0.8% against a composite of the world’s leading currencies, helped boost the price of gold yesterday.  However, the dollar climbed higher today, helping to pressure gold and the broader commodity complex.

While the gold price moved considerably higher during yesterday’s session, its gain paled in comparison to that of silver.  Gold’s sister precious metal soared $1.79, or 6.4%, to $29.70 – marking its best day in over three years, since November 24, 2008.  With the advance, silver recaptured the prior two weeks of losses and is on pace to snap a four-week losing skid.  Silver fell $0.51 to $29.16 per ounce heading into the opening bell on Wall Street this morning.

S&P 500 fell 5.70 to 1266.40 after climbing 1.6% on Tuesday to 1,277.06 on the back of renewed risk appetites and a better than expected report on the U.S. manufacturing sector.  The December ISM Index came in at 53.9, beating the 53.4 consensus estimate among economists.  The data marked the latest in a recent stretch of encouraging reports.  These data points have suggested that despite the headwinds from the European sovereign debt crisis and a slowing economy in China, the U.S. economy may not be headed for a new recession.

The gold price and broader markets maintained their gains following the release of the latest Fed minutes late yesterday.  The summary of the December Federal Open Market Committee (FOMC) meeting revealed that despite the recent improvement in economic data, the U.S. central bank remains quite concerned about the U.S. economy heading into 2012.  The Ben Bernanke-led Fed cited the challenging labor and housing markets, along with the euro crisis, as key factors behind its cautious outlook.

With regard to a third round of quantitative easing (QE3) – a potential key catalyst for the gold price in 2012 – the Fed minutes noted that “A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee’s longer-run economic goals and policy framework.”

Although the Fed once again stopped short of committing to QE3, it is clear that the central bank intends to maintain its dovish stance for the foreseeable future.  Furthermore, three of the most hawkish FOMC members –Fisher, Kocherlakota, and Plosser – are no longer voting members due to a rule where various Fed Presidents are required to rotate their positions on an annual basis.  If economic conditions worsen, the Fed would therefore have a far easier time reigniting the printing presses – a development that would have bullish implications for the price of gold.